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Maybank on the Government Accounting Standards Board issued Statement No. 77, Tax Abatement Disclosures

Tax and Economic Development Alert

August 15, 2015

Today, August 15, 2015, the Government Accounting Standards Board issued Statement No. 77, Tax Abatement Disclosures.

It will generate quite a bit of work for local government. In fact, it may force counties to organize all their fee-in-lieu agreements currently in force (and not just new fee agreements.)

The GASB standards apply to financial reports of all state and local governmental entities, including public benefit corporations. The requirements are effective for financial statements for period beginning after December 15, 2015

The Statement requires governments that enter into tax abatement agreements to disclose the following information about the agreements:

  • Brief descriptive information, 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 gross dollar amount of taxes abated during the period
  • Commitments made by a government, other than to abate taxes, as a part of a tax abatement agreement

The Statement requires disclosure of tax abatement information not only about (1) a reporting government’s own tax abatement agreements but also (2) those that are entered into by other governments and that reduce the reporting government’s tax revenues (e.g., fee–in-lieu and school districts)

For financial reporting purposes, the Statement defines a tax abatement as resulting from an agreement between a government and an individual or entity in which the government promises to forgo tax revenues and the individual or entity promises to subsequently take a specific action that contributes to economic development or otherwise benefits the government or its citizens.

Disclosure information for tax abatements may be provided individually or may be aggregated. Disclosure should commence in the period in which a tax abatement agreement is entered into and continue until the tax abatement agreement expires. Does this require counties to footnote, e.g., fee-in-lieus entered into in 2006?)

The brief disclosure should include descriptive information, including:

  • The mechanism by which the taxes are abated, including
  • How the tax abetment recipient’s taxes are reduced, such as through a reduction of assessed value
  • How the amount of the tax abatement is determined, such as a specific dollar amount or a specific percentage of taxes owed
  • Provisions for recapturing abated taxes, if an, including conditions under which abated taxes become eligible for recapture
  • The types of commitments made by the recipients of the tax abatements
  • The gross dollar amount, on an accrual basis, by which the government’s tax revenues were reduced during the reporting period as a result of tax abatement agreements
  • If the government made commitments other than to reduce taxes as part of a tax abatement agreement, a description of the types of commitment made (reduced impact fees)

Governments should disclose in the notes to financial statements information related to tax abatement agreements that are entered into by other governments and that reduce the reporting government’s tax revenues. This includes school districts for every fee-in-lieu.

Let me repeat: the standard is going to require quite a bit of work for counties particularly in the first year.

Burnet R. (Burnie) Maybank twice served as Director of the South Carolina Department of Revenue. He returned to Nexsen Pruet in 2006 to represents companies and organizations needing assistance with state and local tax (SALT), tax controversy and economic development incentives.