The Essence of Tax Abatements

Tax abatement refers to the reduction of amounts people or firms are obligated to pay in terms of federal, state or local taxes. This decrease may be seen through reduced tax bills, refunds or even reduction of penalties in case it emerges that there was less taxable income than expected.

Tax abatements can happen when too much tax is paid but the phrase is usually associated with these deductions being offered by governments to encourage investments and foster economic growth. For example, tax breaks may be given by local administrations for encouraging developers to build new enhancements and support social welfare programs run by not-for-profit organizations.

Incentive and Benefits

These are tax incentives whose aim is to stimulate certain activities. A business can receive income allowances for purchasing new equipment while governments can reduce property rates in economically depressed areas to attract more residents and businesses into such places. Such incentives are targeted at revitalizing towns while raising their economies at grassroots levels.

Abatements normally serve as a way to reduce the taxpayers’ bill but do not erase it completely. Mostly those who renovate historic buildings or run non-profit based institutions get huge reductions on their dues because they were trying to revive the community benefit (or) simply because they had already overpaid.

For instance, a town could offer tax relief to a company building an additional factory thereby creating jobs and causing the local economy grow further. This resembles what Amazon does when it develops new distribution centers so as offer more job opportunities around.

The Disadvantages of Tax Abatements

However, despite these advantages, there exist some disadvantages of giving away exemptions from paying taxes. Most properties under abatement are situated in less attractive areas which tend to have higher crime prevalence rates. While these exemptions should promote redevelopment, if there is no change in the neighborhood then property prices may fail rise as projected thus making them less desirable owing to this reason.

Also, property owners may need to pay much higher taxes after the abatements expire. It is important that recipients of this tax benefits anticipate a possible increase in their tax liability. Conversely, an abatement period can have unexpected consequences such as changes in tax rates or special assessments leading to an increment in property taxes. Non-payment of the latter could result in revoking the abatement.

The Bottom Line

Generally speaking, it is worth noting that although they are mostly used by governments to stimulate certain investments, these are big savings and advantages associated with tax breaks. For example, they are helpful when investing in new buildings or equipment for use in underprivileged areas. However, there are risks and costs involved with these incentives therefore prior understanding is paramount. Like any other investment, tax breaks must be carefully chosen and planned so as to match with your financial objectives.

Lucas Brown

Senior Writer • Business and Information Trends Writer

Lucas writes long-form, investigative articles that explore the deeper implications of business and information advancements.