posted July 6, 2015

GASB Proposal on Tax Abatements

by Brittney Williams, CPA, CGFM , Audit Manager 

     What is a tax abatement? Tax abatements are used by governmental entities to reduce the taxes a taxpayer would otherwise owe. As a result of this reduction, the taxpayer takes specific action to contribute to the economic development in the region or somehow provide a benefit to the government or their citizens. This reduction is normally for a specified period of time and encourages specific activities such as investments in capital equipment. These abatements are provided by governments largely to entice businesses to relocate or stay within the government’s borders and assist with job creation and maintenance, economic development, redevelopment of blighted or underdeveloped areas or other actions beneficial to the government and its citizens.

      The overall objective of GASB's proposed statement on Tax Abatement Disclosures is to provide financial statement users with essential information about the nature and magnitude of the reduction in tax revenues through tax abatement programs to better assess the sources and uses of financial resources, the compliance with finance-related legal or contractual requirements, whether the current year revenues are sufficient to pay for current year costs and the financial position and economic condition of the government. In general, it will increase the transparency of these transactions and their impact on the government.

  •       What does the GASB propose for state and local government disclosure as it relates to tax abatements?
    • A general description of the abatement, such as the tax being abated, the authority under which tax abatements are provided, eligibility criteria, the mechanism by which taxes are abated, provisions for recapturing abated taxes, and the types of commitments made by tax abatement recipients.
    • The number of tax abatement agreements entered into during the reporting period and the total number in effect as of the end of the period.
    • The dollar amount by which tax revenues were reduced during the period as a result of tax abatement agreements.
    • Commitments made by a government, other than to reduce taxes, as part of a tax abatement agreement.
  •       The GASB has proposed these new disclosures because they believe it is important for taxpayers, municipal bond analysts, legislators and other users of governmental financial information to understand how resources flow into and out of a government each year and use this information to evaluate the governments financial health.

          The taxes of some governments, such as school districts, may be reduced by tax abatements provided by other governments. In this case, the government whose taxes are reduced by abatement programs of other governments would disclose information about those programs.

          Governments will not be required to disclose each of their tax abatement agreements individually as this may not be practical, however they can chose to do so. Alternatively, they may disclose them in the aggregate for each major abatement program.

          The effective date of this proposed statement will be for financial statements with fiscal years beginning after December 15, 2015.

    The content of these pages is for general information purposes only and does not constitute advice. Heinfeld, Meech & Co., P.C. tries to provide content that is true and accurate as of the date of writing; however, we give no assurance or warranty regarding the accuracy, timeliness, or applicability of any of the contents.