Hey Carol –
I have been perusing your site as we are getting ready to start a new homeschool group (breaking off a larger group) in our area. Based on the info I have read, I feel that we identify the most as a 501c7 social group.
We will be offering clubs, fellowship, and field trips as our primary purpose. As a larger homeschool group, we have sold Discount Cards with local businesses/restaurants giving certain discounts to patrons. We sold them for $5 each. This has been a huge fundraiser for the bigger group. One box of cards is $5,000 (not all profit as there is expense from the printing).
My question is if as a new group we could sell these to help with our expenses and if the UBI would be taxable? We definitely want to do things correctly. The sellers would be the members of the group and done voluntarily.
I appreciate any help you can provide. Thanks!
Your organization avoids the UBIT tax because the fundraiser is conducted substantially (or in your case, completely) by volunteers.
But you need to be careful that at least 65% of your total income comes from membership dues. Therefore, a maximum of 35% your income can come from fundraisers. Note that this is income, not the net proceeds of your fundraiser.
Something like this:
Your group’s total income = $10,000
Membership dues (this can include field trip income) must be $6,5000 or more (at least 65% of total income)
Fundraiser income cannot be more than $3,500 (max of 35% of total income)
One of the problems with this type of fundraiser is that it brings in so much income (and of course has substantial expenses as well), it can that it can jeopardize your 501(c)(7) tax exempt status because the fundraiser income exceeds 35% of total income.
This may mean that you are no longer tax exempt and will owe taxes on your surplus each year.
IOW, the IRS requires 501(c)(7) social clubs organizations to get most of their funds from members and not from selling products or other fundraisers.
I hope that helps.
Carol Topp CPA
Our homeschool group has been promised a grant of $3000 which would exceed the 35%. This is a one time donation and will be used for materials that will last year after year. If we receive this donation and pay taxes on whatever the excess of 35% will be, what will happen? Will we lose 501c7 status or will we just have to pay taxes on the excess? Also, what would the tax rate be?
Congratulations on receiving the grant. Unfortunately, your question is so specific that it is beyond the scope of what I do without charge on this blog. It would take some time to research my reply. I am happy to research your question and reply via email. I charge a reduced rate for answering questions via email instead of a phone consultation. Please email me at https://homeschoolcpa.com/contact/
Carol Topp, CPA