Reporting Requirements for Annual Financial Reports of State Agencies and Universities

Specialized Accounting

Tax Abatements

GASB 77 requires disclosure of tax abatements that reduce the reporting agency’s tax revenues resulting from agreements entered into by either:

• The agency
• Other governments
• The agency’s discretely presented component unit(s)

GASB 77:

• Applies to all state and local governments that are subject to such tax abatement agreements.
• Defines a tax abatement as a reduction in tax revenues that results from an agreement between one or more governments and an individual or entity in which:
  • One or more governments promise 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 governments or the citizens of those governments
• Clarifies the recipient as an “individual or entity” that:
  • May be a business or other type of entity (not only a person)
  • May not be a current taxpayer at the time the agreement is entered into (such as in a business relocation agreement)

    –AND–

  • May be a remitter of taxes, rather than the obligor of the tax (such as a retail business in a sales tax diversion agreement)
• Outlines three key characteristics tax abatements must include:
  • Purpose — Utilized as part of economic development programs or programs that benefit a government or its citizens.
  • Revenue Reduction — Nonexchange transactions: lacks an equal exchange of value between willing parties.
  • Existence of an Agreement — A promise by the government to reduce the individual’s or entity’s taxes and a promise from the individual or entity to subsequently perform a certain beneficial action.

Tax abatement agreements may be in writing or implicitly understood by the government and the individual or entity. Legal enforceability is not an essential feature. Tax abatements (along with exemptions and deductions) are a subset of tax expenditures. A timing provision separates tax abatements that are included in the scope of GASB 77 from an exemption and deduction that is not within the scope of GASB 77. The timing provision occurs when the agreement (written or implicit) precedes the promise by the government to reduce taxes and the fulfillment by the individual or entity of the promise to act.

For the purposes of GASB 77, a transaction’s substance (not its form or title) is a key factor in determining if the transaction meets the definition of a tax abatement. The primary focus is on the amount of revenue not collected as a result of the tax abatement agreements, which is informative about an agency’s economic condition and, therefore, highly relevant to the objectives of financial reporting.

General Disclosure Principles

Disclose and distinguish information about each tax abatement agreement in Note 31 according to the following general principles:

• Disclose information for tax abatements individually or aggregated.
• Organize tax abatement disclosures resulting from agreements entered into by the agency (whether presented individually or aggregated) by each major tax abatement program (such as an economic development program or a television and film production incentive program).
• Organize tax abatements resulting from agreements entered into by other governments (whether presented individually or aggregated) by the government that entered into the tax abatement agreement and the specific tax being abated.
• Begin disclosure in the fiscal year in which a tax abatement agreement begins and continue until the tax abatement agreement expires (except as specified in GASB 77, paragraph 7d).

Disclose the tax abatement for as long as the tax abatement remains outstanding. However, once the agency has fulfilled the commitment under an agreement, GASB 77 does not require to continue disclosure even if the related tax abatement remains outstanding.

Disclosure Requirements

Agencies disclosing information about individual tax abatement agreements must present (individually only) those that meet or surpass a quantitative threshold selected by the agency (as described in GASB 77, paragraphs 5c and 5d).

Agencies that are legally prohibited from disclosing specific information required by GASB 77 may omit that information (subject to the requirements of GASB 77, paragraphs 7f and 8e).

Agreements by the Agency

Disclose information related to tax abatement agreements entered into by the agency in Note 31 and include:

• Brief descriptive information, including:
  • Names (if applicable) and purposes of the tax abatement program(s)
  • Specific taxes being abated
  • Authority under which tax abatement agreements are entered into
  • Criteria making a recipient eligible to receive a tax abatement
  • Mechanism by which the taxes are abated, including:
    • How the tax abatement 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 any) including the conditions under which abated taxes become eligible for recapture
  • Types of commitments made by the recipients of the tax abatements
• Gross dollar amount (on an accrual basis) by which the agency’s tax revenues were reduced during the fiscal year as a result of the tax abatement agreement(s).
• If amounts are received (or are receivable) from other governments in association with the forgone tax revenue, disclose:
  • Names of the governments
  • Authority under which the amounts were (or will be) paid
  • Dollar amount received (or receivable) from other governments
• If the government made commitments (other than to reduce taxes as part of a tax abatement agreement) describe:
  • Types of commitments made
  • Most significant individual commitments made — disclose information about a commitment (other than to reduce taxes) until the government has fulfilled the commitment
• If tax abatement agreements are disclosed individually — include a brief description of the quantitative threshold the government used to determine which agreements to disclose individually.
• If a government omits specific information required by GASB 77 because the information is legally prohibited from being disclosed — include a description of the general nature of the tax abatement information omitted and the specific source of the legal prohibition.

Agreements by Other Governments

Disclose information related to any tax abatement agreement(s) entered into by other governments (that reduced the agency’s tax revenues) in Note 31 and include:

• Brief descriptive information — include the names of the governments entering into the tax abatement agreement and the specific taxes being abated.
• Gross dollar amount (on an accrual basis) by which the agency’s tax revenues were reduced during the fiscal year as a result of tax abatement agreement(s).
• If amounts are received (or are receivable) from other governments in association with the forgone tax revenue, disclose:
  • Names of the governments
  • Authority under which the amounts were (or will be) paid
  • Dollar amount received (or receivable) from other governments
• If tax abatement agreements are disclosed individually — include a brief description of the quantitative threshold the agency used to determine which agreements to disclose individually.
• If a government omits specific information required by GASB 77 because the information is legally prohibited from being disclosed – include a description of the general nature of the tax abatement information omitted and the specific source of the legal prohibition.

Agreements by the Agency’s Discretely Presented Component Unit(s)

Disclose tax abatement agreements entered into by an agency’s discretely presented component units according to the provisions of GASB 77, paragraph 7, if the:

1. Agreements reduce the agency’s tax revenues

   –AND–

2. Agency concludes that the information is essential for fair presentation (based on the application of GASB 14, as amended)

Otherwise, disclose such tax abatements according to the provisions of GASB 77, paragraph 8.