Government Accounting Advisor: New Tax Abatement Disclosures Required

October 6, 2015

Many state and local governments provide tax abatements or other tax reductions to businesses or taxpayers to promote economic development, job growth, redevelopment of blighted or underdeveloped areas and other actions that are beneficial to the government or its citizens. Governments may provide information about the abatements to the public, but the information may not always be adequate to assess how tax abatements affect the government’s ability to raise resources in the future and the impact on their financial positions and results of the operation.

GASBS No. 77, Tax Abatement Disclosures, requires new disclosures on tax abatements to provide information about these agreements and how they impact a government’s financial position. The new disclosures are intended to assist financial statement users with assessing (1) if a government’s current-year revenues were sufficient to cover current-year services, (2) if a government is in compliance with finance-related legal and contractual obligations, (3) the source of a government’s financial resources and how they are used and (4) the government’s current financial position and economic condition and how they have evolved. The new disclosures are required whether a tax abatement agreement is issued by the reporting government or initiated by another government that reduces the reporting government’s tax revenues.

Tax Abatement Definition

GASBS No. 77 defines tax abatement for financial reporting purposes as the result of an agreement between a government and a taxpayer where the government promises to forgo tax revenues that the government is entitled and the taxpayer promises to take a specific action that contributes to economic development or provides some type of benefit to the government or its citizens.

General Principles for the Disclosures

GASBS No. 77 provides the following general principles for disclosures regarding tax abatement agreements:

Disclosures need to distinguish between tax abatements resulting from agreements issued by the reporting government and agreements issued by other governments that reduce the tax revenues of the reporting government.

  • Tax abatement disclosure information may be provided individually or in aggregate.
  • Tax abatement disclosure information for agreements issued by the reporting government should be organized by each major abatement program.
  • Tax abatement disclosure information for agreements issued by other governments should be organized by the government entering the tax abatement agreement and the particular abated tax.
  • Disclosure should begin in the period that the tax abatement agreement is entered into and continue until the expiration of the agreement.

Required Disclosures

When a government chooses to disclose information about individual tax abatement agreements, the government should present only individual agreements that meet or surpass a quantitative threshold, as determined by the government.

For tax abatement agreements issued by the reporting government, GASBS No. 77 requires the following disclosures:

  • General Descriptive Information. The general descriptive information consists of the name and purpose of the tax abatement program(s), tax being abated, the authority that the tax abatement agreement are created under, the criteria that must be met for the taxpayer to be eligible for the abatement, the method in which the taxes are abated, provisions for recapturing abated taxes and the types of commitments made by the recipient of the tax abatement.
  • Amount of Taxes Abated. The gross dollar amount, on an accrual basis, of the reporting government’s tax revenues during the reporting period because of the tax abatement agreements.
  • Amounts Received or Receivable from Other Governments. If amounts are received or receivable from other governments for forgone tax revenue, disclose the government names, the authority for the payment of the amounts and the amount received or receivable from other governments.
  • Other Commitments Made by a Government. The government should provide a description of any types of commitments other than the reduction of taxes, such as to build infrastructure assets, made by the reporting government as part of tax abatement agreements and the most significant individual commitments that are not to reduce taxes, if any, made by the reporting government as part of tax abatement agreements. The information regarding commitments not related to tax reductions should be disclosed until the reporting government fulfills the commitment.
  • Individually Disclosed Tax Abatement Agreements. For any tax abatement agreements that are individually disclosed, the government should provide a short description of the quantitative threshold used by the government to determine which agreements would be individually disclosed.
  • Omitted Information. If specific information that GASBS No. 77 requires to be disclosed is omitted by the government because it is legally prohibited from being disclosed, the government should provide a description of the general nature of the tax abatement information that was omitted and specific source of the legal prohibition.

For tax abatement agreements issued by other governments that reduce the tax revenues of the reporting government, GASBS No. 77 requires the same disclosures as those previously mentioned for the issuing government with the following exceptions:

  • Brief Descriptive Information. Instead of general descriptive information, only brief descriptive information is required consisting of the names of the governments that entered into the tax abatement agreement and the specific abated taxes.
  • Other Commitments Made by a Government. This disclosure is not required of the reporting government for abatement agreements issued by other governments.

Effective Date

The requirements of GASBS No. 77 are effective for financial statements for periods beginning after December 15, 2015, with earlier application encouraged.