Government Entities According to the IRS
The Internal Revenue Service (IRS) is a government agency responsible for enforcing tax laws in the United States. This organization groups taxpayers into several categories, based on factors such as income and types of organizations. One such classification is the governmental entities, which includes various levels of government organizations such as states, counties, cities, and municipalities. In this article, we will explore in detail what a governmental entity entails, what types of entities are considered as such, and the tax implications that come with it.
What is a Governmental Entity?
A governmental entity is an organization that is created, operated, or owned by federal, state, or local government units. These organizations take various forms, from schools and libraries to transportation systems, hospitals, and public utilities. The common factor among these entities is that they operate on behalf of the public good and not for private gains.
Governmental entities are different from other organizations in that they have special privileges and immunities that come with being associated with the government. For example, they are exempt from some taxes and enjoy certain tax benefits. These benefits are available to the taxpayers who support and maintain these entities, who are generally public.
Types of Governmental Entities
Based on how participants fund the organization, there are two types of governmental entities – Federally Funded Entities and Non-Federally Funded Entities. The former receives funds from the Federal government while the latter does not. In contrast, based on how these entities are legally organized and their functions, there are six types of governmental entities as follows;
State governments: This is the highest level of government and is responsible for overseeing all other branches of the local government, including counties, cities, municipalities, and school districts. State governments are also responsible for handling a wide range of services, such as infrastructure development, public safety, education, and income maintenance. They are funded through taxes such as sales tax, income tax, and excise taxes.
County governments: Counties are the next level of government, often responsible for delivering numerous services such as emergency management services; community development; public health; law enforcement and judicial systems. They are funded through various taxes such as property tax or any of the taxes paid at the state level.
City governments: Cities are local areas within a county responsible for providing services such as fire protection, sanitation services, police services, and transportation infrastructure, among others. They are funded through property taxes, which are collected, evaluated, and determined based on the city’s population, among other factors.
School districts: This type of governmental entity is responsible for governing and administering schools within a particular geographic area, commonly referred to as a district. They are funded using school taxes such as property taxes, which are collected, evaluated, and determined based on the district’s population size, among other factors.
Municipalities: These are specialized local governments that govern individual metropolitan areas, such as towns, villages, or boroughs. They provide services such as public transportation, emergency management services, public safety services, public works services, among others, and are funded through sales tax.
Public universities: These are entities that serve a purpose of providing higher education to the public. They have tax exemptions under certain criteria according to the Internal Revenue Code.
Tax Requirements for Governmental Entities
As mentioned earlier, governmental entities enjoy certain tax benefits. These benefits come with certain responsibilities and requirements that must be met by these entities to maintain their tax-exempt status. Here are some of the tax requirements for governmental entities:
Non-Profit Tax Exempt Status – Governmental entities can qualify for non-profit tax-exempt status under Internal Revenue Code (IRC) section 501(c)(3), which is generally used by charitable organizations. To qualify, an entity must meet specific requirements, such as being organized and operated exclusively for charitable, scientific, literary, or educational purposes, and not part of any political campaigns. Once an entity has been granted tax-exempt status, it must file Form 990 annually to disclose key financial data.
Tax-Exempt Bonds – Governmental entities may issue tax-exempt bonds to fund capital expenditures or to refinance existing debt. These bonds are issued to investors who do not pay federal income tax on the interest income received. In exchange, the governmental entities must use the bond proceeds for specific purposes and follow specific rules, such as arbitrage rules that limit the profit the issuer can make by investing the bond proceeds in higher-yielding securities.
Filing their tax returns – A governmental entity must file Forms 1120-H, U.S. Income Tax Return for Homeowners Associations, or 990T, Exempt Organization Business Income Tax Return, by the due date for their return. In general, governmental entities are not subject to income tax but can still file a tax return for transparency and accountability reasons.
Withholding Tax – Governmental entities are not required to withhold tax from employee wages. While they may choose to do so manually, they are not obligated by law to hold a specified percentage.
Sales Tax – Many states grant exemptions to various government agencies from the sales tax imposed on the purchase of goods and services. These sales tax exemptions are also available for purchases that support the government’s business, including those conducting day-to-day activities or economic development activity.
Property Tax – Governments are often exempt from paying property taxes on the property they operate. However, private individuals and businesses that lease property owned by the government are still responsible for paying property taxes.
The Bottom Line
In conclusion, governmental entities play a critical role in providing public goods and services, whether local or at the state level. They generally receive special treatment concerning taxes and can be tax-exempt under different circumstances. However, given the importance of these entities, they bear a unique responsibility to the public. As such, they must comply with specific tax requirements, including the filing of tax returns and reporting of financial data. Simultaneously, taxpayers need to act positively by supporting these entities through taxes and other means to ensure their continued operation toward the people’s greater good.
The IRS levies taxes on the majority of U.S. citizens, including individuals who work for government entities or corporations. The only individuals exempt from federal taxation are soldiers engaged in war or peace-making efforts. All other workers, land owners, or employers are subject to federal taxation. The reach of the IRS extends to government entities for both collection purposes and to meet financial reporting requirements. The IRS has outlined policies on its website-www.IRS.gov-to document its procedures, goals, organizational efforts, and directions to fill out all IRS forms.
The primary IRS form required for filing for government entities is the 990, entitled “Return of Organization Exempt from Income Tax.” This IRS form can be found at www.IRS.gov, and fulfillment is necessary for all tax-exempt and non-profit organizations.
The 990 is not an IRS form that calculates a tax or requires filing for levying purposes, but instead, filed for annual information purposes. The IRS must document and file all financial statements and information gathered by all forms of businesses in America. Forms such as the 990 force non-profits, government organizations, and other tax-exempt groups to keep “clean” books and stray away from illegitimate or corrupt business practices.
The filing requirements of the various non-profit organizations vary based on size and amount of financial impact. For instance, organizations with under $25,000 in gross annual receipts are not required to file the 990, while a short version of the IRS form (990-EZ) is available to government entities with gross receipts between $25,000-$500,000 and total assets of under $2.5 million. The 990 provides the IRS with public information that otherwise would not be made transparent.
The information-gathering form extends to “higher ups” of the varying agencies and documents salaries, executive maneuvers, investments, and other significant disclosures. The information acquired from the IRS form is made public under the IRC 6104 (d) which states that an organization must supply a requester with all public information. The 990 simply impedes non-profits from abusing their non-exempt status.
Government entities are freed from the federal income tax levied administered by the IRS. In order to be considered tax-exempt a government agency is required to file a “determination” letter to prove its exempt status. Once the letter has been filed the IRS will review it and act accordingly in determining an exempt status. To avoid procedural red tape, government entities usually just supply the IRS with a tax-exempt number for identification purposes. For example, a federal government entity may use its Federal
Taxpayer Identification Number (FTIN) to prove its non-exempt status. Governmental units such as, states, counties, municipalities, or their agency departments are also freed from paying the federal income tax. The exemption of such governmental units arises pursuant to tax code section 170(c)(1) which the IRS must follow. The income of such entities is excluded from the typical definition of gross income so long as the assets incurred are, (1) derived from public service or utility that offers an essential governmental function or (2) is gathered from a State government or subdivision of a political office.
The “government affirmation letter”, which is sent by the IRS, documents the special exemptions awarded to government agencies in the United States. This letter pursuant to the Internal Revenue Code details the reason for income tax exemption as well as permissible deductible contributions. The letter itself is available for download at the IRS website-www.IRS.gov.
