Accounting for Nonprofit Memberships

Nonprofit organization memberships are becoming increasingly common, often implemented for their humanitarian benefits. In this discussion, we’ll break down the details of accounting for memberships for a nonprofit organization.

Why would a nonprofit offer memberships?

Memberships offer members a sense of community, creates a space for those with similar or specific interests, and help create connections that might otherwise be missed. Members may be given access to exclusive resources, be invited to exclusive events, have access to reduced ticket prices, and may be privy to new information before it’s released to the general public. All of these factors entice people to purchase memberships. In exchange, the organization offering the membership has a dedicated group of followers, and a more-or-less guaranteed source of income. Creating a meaningful and successful membership program helps the organization foster longevity and support growth.

Membership Revenue Recognition

Memberships are considered exchange transactions, meaning that both the organization and the member receive benefit from engagement in the membership program (as we just discussed). As a result, revenue should be recognized according to the structure of the exchange.

Let’s consider two types of memberships: the monthly charge and the annual fee. For this discussion, let’s keep it simple and limit the benchmark for revenue recognition to the passing of time.

Some organizations choose a month-to-month charge for their membership structure, or offer it as an alternative to an annual fee. Typically, a monthly charge is set up when the member first agrees to purchase a membership so that their payment method is charged one time each month. This is to the benefit of the member because the monthly fee is smaller than a full annual charge, and to the benefit of the nonprofit as well because they receive a steady, somewhat predictable stream of cash. Where an organization charges on a monthly basis, the fee is recognized as revenue when billed (accrual basis) or when received (cash basis).

The annual membership fee is just as common, where the member signs up for a certain period – typically one year – of membership, and pays a one-time fee. The advantage of the annual membership fee to the organization is that it’s usually a larger infusion of cash, though it only happens one time per year per member. The advantage of the annual membership to the member is that the total cost for one year is very often discounted compared to 12 months of monthly charges. However, annual memberships present an accounting challenge: the revenue should be recognized pro-rata over the membership period. The portion of the membership payment pertaining to periods that have not yet passed are deferred revenue – a liability on the organization’s financial statements. Let’s walk through an example.

Annual Membership at P&B

Park and Beach (P&B) organization normally charges visitors a per-day fee to enter the park or visit the beach. The per-day fee is purchased at the entrance, covers admittance to the park on the day of the purchase, and cannot be used on another day. This makes their revenue very easy to manage from an accounting perspective, but creates a highly seasonal revenue stream where they may be at-capacity for the summer and fall months, but have very few visitors in the winter and spring. In order to help smooth their revenue, encourage repeat visitors, and develop a sense of ownership among their patrons, P&B decided to offer an annual membership. The annual membership provides unlimited visits for the 12 months following the date of purchase.

One visitor – we’ll call her Evelyn – loves the park but doesn’t care for the $15/day visitor fee, so she purchases a one-year membership for $150 on June 1.

On June 1, P&B records the cash received, and books the deferred revenue.

Cash – increases by $150.00
Deferred Revenue-Park Entrance (a liability account) – increases by $150.00

Now P&B must recognize the Deferred Revenue as Earned Revenue on a pro-rata basis as the 12-month membership passes. Since P&B’s accounting is reconciled on a monthly basis, the annual membership is broken into 12 ($150 / 12 months = $12.50 per month). At the end of each month, P&B records:

Deferred Revenue-Park Entrance (a liability account) – decreases by $12.50 (the liability is being removed from the books)
Earned Revenue-Park Entrance – increases by $12.50

At the end of 12 months, Evelyn’s membership is fully recognized.

Practical Considerations for Nonprofit Memberships

Tracking memberships and determining how to calculate the recognition amount for each month depends on the organization’s membership structure. In the example above, P&B sells memberships year-round, and uses a software which generates a monthly report identifying each member’s date of membership purchase, and their membership price. P&B’s accountant uses that report to calculate the recognition entry for each month. An organization that opens membership sales only once per year would only need to calculate the recognition amount once, and could even record the entries pre-dated in the accounting system.

Because the metric for revenue recognition depends on the membership agreement, you must be careful how the membership benefits are written. If a membership is for a certain period of time, and provides no certain number of “instances” (visits, shows, meetings, etc), the membership is accounted for as above. If the membership is for a certain number of instances without regard to a time frame, the number of instances must be tracked for each membership. This can put a very heavy strain on the organization, because each membership would need to be tracked at a fairly granular detail. The best way an organization could successfully track instances is with the aid of an automated system (such as a key fob which reports to a system to generate a report detailing who used up instances and when), or if there were only very few memberships to track.

Special Considerations for Memberships

Nonprofit organizations offer a subtle, additional advantage with their memberships: tax deductibility. IRS Publication 526 states that individual taxpayers “may be able to deduct membership fees or dues [paid to] a qualified organization.” In non-IRS speak, this means that membership dues and fees paid to a nonprofit organization (as identified by the IRS-issued formation status) are deductible expenses on the individual taxpayers return. Basically, you can deduct membership dues and fees like you would a charitable contribution. However, the amount you can deduct as membership dues and fees, like a charitable contribution, is limited to the excess paid over the benefits you receive.

This is where fair market value comes into play. Say your nonprofit offers a tier of membership that provides 3 free visits to your park, for a membership fee of $100 per year. Park admission is normally $15 per person, so fair market value of those free visits is $45 ($15 x 3 visits). The amount that a member can deduct as nonprofit membership dues and fees is limited to $55 – the excess of the membership price of $100 over the benefits received of three visits totaling $45. The taxpayer is limited to that amount regardless of whether they used their free visits.

The IRS does list certain membership benefits that may be disregarded if they are received in return for an annual membership for $75 or less. This list includes admission. So, if in the example above we changed the annual membership to $50, the entire amount may be deducted from their individual tax return as a qualified membership.

If your gift acknowledgement senses are tingling, you’re onto something! As you may know, nonprofits must provide a letter acknowledging quid pro quo contributions greater than $75, and no-return-value contributions of $250 or more (discussed with examples in this article). Memberships fall under this requirement as well. As discussed earlier, memberships are generally considered exchange transactions, and therefore follow the $75 quid pro quo rule. Thus, a membership with an annual rate of more than $75 would require a gift acknowledgement for the excess of the fair value received – which is also the amount which the taxpaying member would be able to deduct on their individual tax return as a charitable contribution.

Are 501(c)6 memberships deductible?

This discussion focuses on memberships organized by nonprofit organizations, but not all nonprofits are created equally. 501(c)6 organizations are often termed “nonprofit organizations,” but they are non-charitable in the eyes of the IRS, where they exist to serve their members rather than the public. As a result, the memberships for 501(c)6 organizations are NOT tax deductible to the members. Further discussion of 501(c)6 organizations exceeds the scope of this article, so we’ll table that for another day.

Final Comments

Because memberships are generally considered exchange transactions, it’s beneficial to the organization to write the membership agreements as simply as possible. Limiting the benchmarks for recognition will make it easier for the organization’s accounting team to properly recognize membership revenue without creating time-consuming calculations and recognition schedules. If you have any concerns about accounting for your existing memberships, the benchmarks for revenue recognition, or any questions about structuring your new membership program, schedule a call with us!

Written by Anna Baumgardner, CPA | Published 01/20/2023