GASB 77 tax abatements: Frequently asked questions
Recently Plante Moran held a webinar regarding GASB 77 where we discussed the Governmental Accounting Standards Board’s new rules related to tax abatements. Topics included defining a tax abatement and common types of agreements that qualify as such, hints and tips on how to implement the standard, and requirements for financial statement footnote disclosures.
In addition to great feedback, we also received some excellent questions. Answers to many of those questions are provided below, but please reach out to your Plante Moran contact if you have additional questions or would like to discuss these topics further.
- What criteria constitutes a tax abatement under GASB 77?
All of the following must exist for an agreement to qualify as one requiring disclosure under GASB 77:
- A promise by the government to reduce taxes
- The reduction in taxes results from an agreement with an individual or entity
- The individual or entity promises specific action
- The specific action occurs after the agreement has been entered into
- The specific action contributes to economic development or otherwise benefits the government or its citizens
- What if the governmental units granting tax abatements have a year-end that’s different from my organization? Will that change how we compile information for our financial statements?
Since the government that granted the abatements will eventually need to compile the information for their financial statements, the simplest solution is for them to work ahead.Additionally, GASB 77 requires that the gross dollar amount, on an accrual basis, by which the reporting government’s tax revenues were reduced during that government’s reporting period be disclosed. Yes, this does technically require you to disclose this information based on your fiscal year. It might be worth evaluating whether obtaining and disclosing this information based on the tax year, which likely is the easiest format in which to get this data, would be a pretty close approximation of your foregone tax revenue for your reporting period.
- Will cities entering into tax abatement agreements be required to make this information publicly available so that impacted entities, such as school districts, have the information for reporting purposes?
There is no legal mandate requiring governments to make tax abatement details public –– so unless governments voluntarily share this information, impacted entities will need to obtain the data governments that have granted abatements impacting your organization’s revenue.GASB 77 does allow a government to omit specific information from this disclosure if it is legally prohibited to be disclosed, but governments must still disclose a description of the general nature of the tax abatement information omitted and the specific source of the legal prohibition.
- Do the disclosure requirements apply only to new agreements? What about previous agreements?
The disclosure requirements within GASB 77 apply to all agreements currently in place regardless of when they were entered into.
- Do sales tax rebates constitute an "abatement"? For example, we rebate 40 percent of the sales tax collected by an entity in exchange for the entity promising to keep its business located within the city.
If there is a specific agreement between the city and the entity, this may meet the definition of a tax abatement under GASB 77. You’d also have to determine whether promising to stay within the city constitutes a “specific action” under the standard that contributes to economic development or otherwise benefits the government or its citizens.
- The city enters into a tax abatement with Company A in 2015 in which the company is required to make specific improvements. In 2017, Company A defaults and fails to provide those agreed upon specific improvements. Does the city still need to disclose the tax abatement even if the company is no longer in compliance with the agreement?
As long as the agreement is in place and taxes were abated in the year being reported, the city should continue to disclose the abatement. In other words, for every year that taxes are abated, disclosure would be required.
- Should the GASB 77 disclosure specify the reduction in taxes by levy type? (Operating vs. Debt, etc.)
The disclosures could certainly include that information, but it is not required.
- Can the disclosures include information regarding the economic benefit?
Yes, as long as the disclosures contain the information required under the standard, the government can opt to include additional disclosures they think would be helpful to the user.
- Is there a materiality threshold for disclosure purposes?
Yes, as with all GASB statements, the standard states the following: “The provisions of this Statement need not be applied to immaterial items.” That said, materiality is a judgmental threshold that should be evaluated in conjunction with your auditors.
- If we prepare comparative financial statements, does GASB 77 require the disclosure of tax abatement information for both the current year (year of implementation) and the prior year?
The statement applies to notes to the financial statement for all periods being presented; however, the Statement does say that if application for prior periods is not practical, the organization must disclose the reason information was not disclosed.
- If we have not entered into any tax abatements and there are none made by other governments that reduce our tax revenue, is disclosure required?
No. If there are no tax abatements either entered into by your government or by other governments impacting your tax revenue, no disclosure is required.
The GASB also has a number of implementation question and answers on GASB 77 that can be found both within GASB Implementation Guide 2016-1 and GASB Implementation Guide 201X-Y, Implementation Guidance Update – 201X (currently in draft form). And remember — the webinar is still available for online viewing.