Election Day Thoughts: Taxes on Country Clubs in the Trump Era

Presidents can change the social fabric of a country, and in reality, President Trump’s tax bill passed in the first term of his presidency has changed the finances of golfers, members, and in fact, clubs themselves to a small degree. To a larger degree, his ownership of some of the biggest golf clubs in the USA and world has changed how clubs do business, classify profits and use funds. No matter what your politics, it’s important to know the changes that are here and that might come in the future as clubs and their Boards plan for the future.

The tax code which deals with not-for-profit social clubs is extensive and is addressed in Section 7 of the US Tax Code. Clubs which are not-for-profit are 501(c) organizations and must maintain that status by adhering to tax legislation which clearly earmarks such clubs as social with members participating in a common activity. There are so many circumstances where a club can fall afoul of the tax code and endanger part or all of its 501(c) status, club governors have to be extremely cautious in activities that go beyond simple club operations.

For example, hosting a golf tournament, where the public is welcome and the income is substantial, can indeed lead to loss of non-profit status.

  1. Golf tournament—A club formed to maintain a country club for the promotion and enjoyment of golf for its members, receives, as host of an annual golf tournament, substantial income from the public, and uses the income for club operating expenses and improvements is not exempt under IRC 501(c)(7). Rev. Rul. 68–638, 1968–2 C.B. 220.

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Basically, income derived from outside of normal club activities cannot be used for improvements or expenses (say to build a parking lot to host more tournament visitors). And those profits do not fall under non-profit income. So, for example, Bellerive Country Club, which hosted the PGA Championships this year, must look carefully at the profits derived from holding the prestigious tournament and how to handle them in its balance sheet.

Given the delicate nature of maintaining the tax status of a club, it’s interesting to note that many newly-formed clubs are going in the direction of corporate or individual ownership. In fact, President Trump, or his businesses, own many of the golf courses at which he plays like Trump Doral and Mar-A-Lago, both in Florida.

Refundable vs Non-Refundable Initiation Fees

Mr. Trump is not alone. In fact, having spoken to several accountants through doing business here at beyondthebaselines.com, we have noted that “refundable” member initiation fees, which were extrememly popular at the height of the boom in the 1980s and early 90s, are in actually interest-free loans. They were derived by equity, or member-owned, clubs to help with capital expenses and growth. The membership, through its Board, would be able to decide on uses for the money – capital expense, maintenance, or stemming losses from a rainy season.

However, with the advent of clubs such as Mr. Trump’s and with the growth of individual and corporate ownership of clubs, these funds have found different uses.  In essence, refundable initiation fees can be used by the business owner or owners as they see fit. In actuality, these funds are interest free loans over long period of times. We wonder if Congress or the President might look at this in upcoming legislation. It’s a win-win situation as the refundable initiation fee can be classified as a liability on a club’s balance sheet, and used to lower corporate tax due.

Some clubs have moved to non-refundable initiation fees, and these yet again, for the corporate or individual club owner, can be used really in any way they see fit given the contract and its wording that they have with the paying “member”. We put “member” in quotes as they are really simply users and not member-owners as has been the case in the old-line country clubs of the 20th Century. However, without the repayment necessary as in refunded intitiation fees, owners cannot put non-refundable intitiation fees as a liability on the balance sheet and should really pay income tax on those funds when received. Looking at how to spend and the timing of spending those funds on improving the club’s facilities is imperative to lessen corporate tax as well.

New Tax Law Doubles The Cost of Doing Business On The Golf Course

This year, with the Republican tax bill, a small but noteworthy change is that a round of golf is no longer deductible against your income. As golf.com writes: “Embedded in the recently approved tax reform bill is a provision that eliminates a 50 percent deduction for business-related entertainment expenses. It applies to a range of activities, including concerts, sporting events and, yes, rounds of golf.”

This could in the long term affect the number of rounds played by corporate golfers doing business on the course. That round of golf just got 50% more expensive. Here’s the good part though: Dinner with that client after the game is still a tax deduction!

Ed Shanaphy is President of BeyondTheBaselines.com which is a consultancy aimed at governing boards of country clubs. He received his undergraduate degree from Duke University and his graduate degree from The London School of Economics.

 

 


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