Increased Scrutiny— GASB Proposes Incentives Disclosures for Tax-Related Incentives

 
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Authored By: Minah C. Hall & Jennifer A. Carroll

Economic development incentives are now a regular part of a site-selection analysis—companies expect them to help overcome certain site disadvantages, and economic development officials maintain they are essential to attracting and retaining expanding companies. However, with increased interest comes increased scrutiny, including the potential inclusion of economic development incentives agreements on granting jurisdictions’ financial statements. In October 2014, the Governmental Accounting Standards Board (“GASB”), which establishes generally accepted accounting principles for government entities, issued an Exposure Draft of a Proposed Statement (“Statement”) regarding tax abatement disclosures. With this Statement, GASB endeavors to bring greater transparency in all state and local governments’ financial statements regarding transactions whereby a governmental unit “promises to forgo tax revenue” in consideration for specific taxpayers’ “promises to take specific action.”


The Statement is concerned with “Tax Abatements,”which GASB defines broadly as any “mechanism used to reduce taxes,” including “exemptions, deductions, credits, rebates, and abatements,” stating these terms “are used interchangeably to describe similar transactions.” Therefore, this proposed language may concern all manner of economic development programs offered by all state and local governments relating to tax revenue, with few exceptions including, cash grants, free land, and utility rate reductions. The Statement is only applicable to economic development agreements that are tax related and formalized by an agreement with ongoing obligations of both the government entity and taxpayer. Some examples of programs that would be subject to these sorts of disclosures include the Illinois Economic Development for a Growing Economy (“EDGE”) Tax Credit , the Florida Qualified Targeted Industry (“QTI”) Tax Refund, and the Texas Enterprise Zone program, to name a few. GASB explicitly notes “[t]he intention of this Statement is not to encompass all forms of tax expenditure[s],” but only those used for the purpose of economic development, whereby reducing tax revenue and summarized in an agreement as the basis for the reduction in tax. 

The Statement also excludes broad tax exemptions and deductions for tax expenditures whereby the taxpayer performs the incentivized activity prior to the government commitment to reduce tax liability (e.g., tax credits for installation of energy-efficient appliances or fixtures). GASB proposes governments engaged in tax-related economic development agreements disclose the following information on their financial statements:

  • “General Descriptive” information, including the tax being abated, the authority under with the incentive is offered, and the incentive’s eligibility criteria (recipient’s commitments),
  • The total number of tax-related incentive agreements entered into during the reporting period and the cumulative number of agreements in effect at the close of the period,
  • The amount of the tax abated during the reporting period, and
  • Recapture/clawback provisions
In addition, governmental units would need to distinguish between the tax-related incentives offered by the reporting entity and those entered into by other entities that reduce the reporter’s tax revenues. For a government’s own agreements, the entity may choose to disclose individual agreement information or aggregate the information by program. 


The Statement does not request disclosing the tax-related economic development agreement recipients’ names, duration of the incentive, or information regarding the recipient’s compliance with its commitments nor does it provide guidance when an entity may choose to aggregate the tax-related incentive agreement information by program, as opposed to disclosing the agreements individually.

Comments to GASB related to this Statement are due January 30, 2015. Companies already a party to tax-related economic development agreements and those interested in becoming parties in the future should be mindful of the potential consequences of this disclosure, including additional compliance, and public disclosure of confidential company information. Similarly, government entities should review their economic development toolbox to determine the impact of this Proposed Statement on their financial reporting, and potentially seek to implement non-tax related alternative economic development incentives, such as cash grants, utility rate reductions, free land, low-cost financing, and workforce training. Alternatively, the Statement as currently written would allow for non-disclosure of incentives if entered into without an agreement. Furthermore, if the agreement is entered into post-performance, then the factor requiring an agreement entered into prior to the performance by the taxpayer is eliminated. 

How We Can Help
Our team of knowledgeable professionals provides advice and performs services to assist in all aspects of credits and incentives negotiation and compliance. True Partners Consulting's Credits and Incentives team will continue to monitor the developments of this Statement. Should you have concerns about the Statement’s impact on your company and your current or future incentives pursuits, or wish to discuss submitting a Comment to GASB outlining the advantages and disadvantages of this Statement, our professionals would be happy to discuss your specific situation. 

 

Greg Majors
Director of Business Development South/Southwest
813.434.4021
Greg.Majors@TPCtax.com

Kristin Mauer
Director of Business Development Northwest
408.625.5069
Kristin.Mauer@TPCtax.com
 

John Shipley
Director of Business Development Northeast
646.356.7214
John.Shipley@TPCtax.com


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