Are governments and related tax-supported entities nonprofits? (FAQ)

Can government entities accept tax-deductible contributions? The simple answer is that Federal, State, and Local government entities are provided a ‘tax-exempt’ status by the IRS that is similar to (but not the same as) public charities or private foundations under section 501(c)(3). The Office of Federal, State and Local Governments (FSLG) of the Internal Revenue Service, Tax Exempt and Governments Entities Operating Division serves federal agencies, quasi-governmental entities, state agencies and local governments, including U.S. Possessions (American Samoa, Guam, Puerto Rico, and the U.S. Virgin Islands). Further information can be found on the FSLG section of the IRS website.

The not-so-simple element of this question involves the IRS determination of what is (and is not) a tax-exempt government entity. IRS Publication 963 provides definitions and guidelines for determining government status for tax purposes. There are no clear answers when it comes to government instrumentalities such as libraries, schools, etc., as shown in the following excerpt:

“Qualifications of Instrumentalities:

Schools, hospitals and libraries, as well as associations formed for public purposes, such as soil and water conservation, may or may not be instrumentalities. State sponsorship of an organization, state regulation of its activities, the participation of its employees in a public retirement system, and operation with public funds are among the factors to be considered in determining whether an organization is an instrumentality. If an organization is essentially under private ownership and control, it is not an instrumentality.

“Associations formed for conservation, protection and promotion, although they may carry out a public purpose, may not rise to the level of state instrumentalities. The following associations may or may not be state instrumentalities:

  • Soil and water conservation districts
  • Fire associations that protect forestland
  • Associations that promote a state or municipality
  • Documents that establish statutory authority under which the entity was established are required for status determination.”

    If government entities are treated like 501(c)(3)’s, then why do separate fundraising entities exist to support libraries, schools, police, parks, and similar tax-supported bodies? Government status aside, it is not uncommon for tax-exempt organizations to create or align themselves with separate fundraising organizations, such as “Friends of XYZ Library.” There are a number of reasons for (and against) any tax-exempt entity to keep fundraising activities separate. There may be issues of control, liability, mission/purpose, and public perception to name a few. One possible motivation for governmental entities to keep their fundraising activities separate is to keep funds, especially investment funds, out of a state or local government's general fund where it could be used for purposes unrelated to the specific purposes of the governmental entity that initially raised the funds. Further, decision-making resides with an independent board that is probably highly committed to the mission of the government entity and that provides greater continuity than politically appointed government agency heads.

    Thanks to Jennene Colky for prompting the question

    Added 01/14/2004 by jdurnford, Modified 05/24/2006 by jauer


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