GASB 77: New Disclosure Rules for Tax Abatements
Tax abatement programs are widely used by state and local governments, especially in situations where a reduction in taxes will lead to economic development. However, these programs are not always widely publicized—nor understood—by taxpayers and other financial statement users.
With the rollout of Statement No. 77 this past August, the Governmental Accounting Standards Board has taken steps to increase transparency around tax abatements. The statement outlines new rules for financial reporting of tax abatements and will become effective for the fiscal year beginning Jan. 1, 2016.
With that said, here are a few things you should know.
What are tax abatements?
According to the GASB, a tax abatement is a reduction in tax revenues that results from an agreement between one or more governments and an individual or entity in which the following two things are true:
- One or more governments promise to forgo tax revenues to which they are otherwise entitled.
- 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 governments or the citizens of those governments.
An example of a tax abatement: A grocery store chain approaches a city about building a store in its jurisdiction. The city is interested in economic development and attracting new residents, so it agrees to abate or reduce the grocery store’s future taxes. In exchange, the grocery store promises certain parameters, such as a new building, sidewalk, street lights, parking lot, etc., that are agreed upon by both parties. In effect, this agreement is designed to benefit both the government and its citizens.
What is the purpose of GASB 77?
The purpose of this statement is to provide financial statement users with essential information about the nature and magnitude of the reduction in tax revenues through tax abatement programs. In doing so, this will allow users to better understand a government’s financial situation—from knowing where its resources come from to ensuring compliance with legal or contractual requirements.
What does GASB 77 require?
The statement requires governments to disclose relevant tax abatement information on their financial statements. This applies to a government’s own tax abatement programs, as well as those entered into by other governments that reduce the reporting government’s tax revenues.
The statement requires governments that enter into tax abatement agreements to disclose the following information:
- 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 part of a tax abatement agreement
If my organization is affected, what should I do?
If your organization may be affected by these new rules, call your auditor. It’s important to understand the requirements of this new statement; you don’t want to miss anything. It may be difficult to determine which agreements qualify as tax abatements—and that’s where your auditor would be able to help.
Andy Berg, CPA, is AEM’s Government Segment Leader. When he’s not fishing for ways to help governments boost efficiency, he’s casting lines for whopper muskies. You can reach Andy at 952.715.3003 or at email@example.com.