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Governmental Accounting Standards Board Provides Guidance on Tax Abatements

January 10, 2017

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State and local governments have long used incentives and tax breaks in the name of economic development and job creation. These agreements often are an important tool to encourage activities like the relocation of businesses, the construction of new facilities and the retention of jobs with the promise of a reduction in taxes owed. However, generally accepted accounting principles did not fully address these agreements and thus, the Governmental Accounting Standards Board has issued GASB Statement No. 77 Tax Abatements, which is effective for periods beginning after December 31, 2015. Time is quickly running out to gather the necessary information to comply with the new disclosure requirements for calendar year 2016 and fiscal year 2017 financial statements.

The new standard is primarily designed to provide disclosures to assist users of the financials in fully understanding the agreements entered into by a local government and the impact on the financial statements. The standard does not contain new accounting requirements and limits its scope to disclosures. The concept of tax abatement is fully defined and the local government must provide disclosures for agreements they enter into directly as well as agreements that are entered into by other local governments that impact their revenue collections.

It is important to understand the agreements that are considered tax abatements as defined in the standards. An abatement is a reduction of tax revenue that results from an agreement between a local government and an individual or other entity. In an abatement, the local government promises to forgo tax revenues in exchange for the individual or entity’s specific actions that contribute to economic development or otherwise benefit the local government or its citizens. For example, a local government may forgo property taxes to which it is legally entitled in exchange for the relocation of a new employer. In return, the employer promises to hire a specific number of employees and remain in the facility for a specific period of time. Tax Incremental Financing (TIF) agreements result in tax revenue being reallocated (for debt service or capital payments) instead of being reduced. As such TIF agreements are not deemed a tax abatement under GASB Statement No. 77.  Ultimately, an agreement’s substance, not its title or form, will determine if it is subject to disclosure.

GASB 77 contains a number of general principles that local governments should understand as they consider new disclosures. First, disclosures should distinguish between agreements that are entered into by the reporting governments, and agreements that have been entered into by other governments that will reduce the reporting government’s revenues. Thus, if a local government has not entered any such agreements but has a future loss of revenue due to the agreement signed by another local government, disclosures will still be required.
Second, disclosures can be for individual agreements or aggregated for all similar agreements.  If the reporting local government entered into the agreements, disclosures should be organized by each significant tax abatement program. However, if the tax abatements were entered into by another local government, the disclosures should be organized by the government that entered into the agreements. Finally, disclosures should start in the period in which the agreement is entered and continue until it expires.

The specific disclosure requirements for tax abatements entered into by reporting governments include:

  • A brief description that includes the purposes of the tax abatement program, including the taxes abated, the legal authority for the agreement, the criteria for recipients, how the recipient’s taxes are reduced, the commitments made by the recipient and any provisions for recapture.
  • The gross dollar amount the local government’s revenues were reduced by the agreement during the reporting period, on the accrual basis of accounting.
  • Any other commitments that were made by the local government (other than reducing taxes).

For agreements entered into by other governments that reduce the reporting government’s revenue, the following items should be disclosed:

  • A brief description including the names of the governments entering into the agreements and the taxes abated.
  • The gross dollar amount the local government’s revenues were reduced by the agreement during the reporting period, on the accrual basis of accounting.
  • If amounts have been received or are receivable related to the forgone revenue (generally referred to as payments in lieu of taxes), the names of the local governments and the dollar amounts to be received from other governments.

Finally, if a local government omits any component(s) of the required disclosures because it is legally prohibited from disclosing these arrangements, a general description of the tax abatement should be disclosed along with a discussion of the legal prohibition.

Since many tax abatements have existed for years, it may require considerable effort to gather all agreements in a local government that does not have centralized administration. It will also necessitate the review of all outstanding agreements to ensure disclosures are complete and accurate. Local governments are advised to address this reporting requirement early on in the process of putting together financial statements to avoid delaying the completion of annual financial reporting.

All content provided in this article is for informational purposes only. Matters discussed in this article are subject to change. For up-to-date information on this subject please contact a Clark Schaefer Hackett professional. Clark Schaefer Hackett will not be held responsible for any claim, loss, damage or inconvenience caused as a result of any information within these pages or any information accessed through this site.

Guidance

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