On August 14, the Governmental Accounting Standards Board (GASB) issued Statement No. 77 (Statement 77), Tax Abatement Disclosures. The purpose of this statement is to provide financial statement users with further information related to a government’s tax abatement agreements, and the impact of such agreements on the government’s financial condition. The GASB concluded that providing users with further information about the sources and uses of financial resources, including limitations on the source of financial resources, would be relevant when analyzing the economic condition of a government.
Tax abatements are defined by Statement 77 as a reduction in tax revenues that results from an agreement between a government and an individual or entity in which the government promises to forgo tax revenues to which they are otherwise entitled, and the individual or entity promises to take a specific action after the agreement has been entered into that contributes to economic development, or otherwise benefits the government. Such tools are used widely by governments as an economic development tool, with goals that may include increasing the tax base, revitalizing distressed economies, or retaining or attracting jobs.
Statement 77 will require state and local governments to add new financial statement footnote disclosures about tax abatement agreements, but does not have an impact on the face of the basic financial statements. The new disclosures will include descriptive information related to tax abatement agreements, including the purpose of the program, the taxes being abated, the mechanisms by which taxes are abated and recaptured, if applicable, and the types of commitments made by the recipients of the abatements. The gross dollar amount by which the government’s tax revenues are reduced as a result of the tax abatements during the period will also be disclosed. If there are amounts received or receivable from other governments in association with the forgone revenues, the names of those governments, and the dollar amount received or receivable from the other governments will also be disclosed.
Lastly, if a government makes commitments other than a tax reduction as part of the tax abatement agreement, disclosure of the types of commitments made is required until they are fulfilled by the government. Similar disclosures are required for tax abatements that are entered into by other governments, and reduce the reporting government’s tax revenues.
The tax abatement agreements can be disclosed individually, or may be aggregated. If agreements are disclosed individually, a description of the quantitative threshold used to determine which agreements to disclose individually should be included in the footnote disclosure.
This statement is effective for periods beginning after December 15, 2015. The full text of Statement 77 is available here.
Any federal tax advice contained in this communication (including any attachments): (i) is intended for your use only; (ii) is based on the accuracy and completeness of the facts you have provided us; and (iii) may not be relied upon to avoid penalties.
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