What is Tax Abatement? A Guide for Business Operators

Tax credits come in all forms and for almost any conceivable situation. This article aims to define tax abatements and how they can affect owners of business property.


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What are tax abatements?

Tax abatements are reductions in the amount of taxes an individual or company is responsible for paying. Property tax abatements are offered by some cities in the form of programs that reduce or eliminate property tax payments on qualifying property for a set amount of time to be determined on an individual case basis. These abatement programs are focused on attracting revenue to those areas that need the influx of urban renewal in an attempt to revitalize those areas with business, jobs or local infrastructure. 


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Creating tax abatements

Abatements can be created by federal, state and local governments and can vary in length of time, requirements and restrictions. Cities create abatements and other tax incentives hoping to stimulate the local economy and encourage growth in the form of new construction, energy-efficient building improvements and new residents. In these cases, the money the city forgoes is expected to be offset by resulting increases in tax revenue from such economic growth.


Tax abatements may be offered to qualifying individuals or businesses with stipulations attached. These stipulations can be monetary, in which the individual must earn less than a set threshold of income to continue qualifying for the abatement, or they can be related to other conditions, such as an agreement that the business will perform certain improvements to the building. If conditions fail to be met, the abatement can be removed and the full tax amount will be owed.


Best practices for property tax abatements

Some best practices relating to property tax abatements include: 


  • Know what you’re getting. Research the area you’re looking to buy a residential or commercial property, as these types of tax breaks are typically applied to properties in areas that may experience elevated crime rates, lower property values and no guarantee of an increase in property value after the sale. These traits are why tax abatements are offered, so when you consider taking one, it is assumed that your purchase will bring value to the area, joined by others until the area is thriving once again. 

  • Be cognizant of the abatement’s duration. Remember that the timeline of a tax abatement is determined based on individual cases, so be aware of how long your abatement is set for. Timelines can vary from less than a year to indefinitely.

  • Be mindful of tax payment deadlines. In addition to the conditions above, if the property owner fails to make timely property tax payments, the tax abatement can be revoked. 

  • Plan for tax bill increases. Property taxes can rise significantly when an abatement ends, so to avoid the shock of an abnormally large tax bill, check property records to find out what the unsubsidized amount of property taxes would be and budget for that amount. 

  • Know all of your options. If you own a business that rents its space, you won’t qualify for a property tax abatement, but there are other available tax credits you can apply for, including credits for conducting your business in an environmentally sustainable way, using electric or hybrid vehicles for normal business operations, healthcare credits, research credits and more. Talk to your tax professional to determine which credits your business can qualify for.

Related: 10 Steps to Starting a Business


Tax abatement FAQs

The following questions are commonly asked about tax abatements: 


Which local governments can grant tax abatements? 

Tax abatements can be granted by any local government that collects ad valorem, or value-based property tax, however, abatements can be granted only for property within a reinvestment zone. A reinvestment zone, or a tax increment reinvestment zone, is an area in which a local government has designated to raise funds through future tax collections to make public improvements for roads, schools or municipal recreation. The city is required to file a plan with the state with an outline for financing and agreements on where the generated funds will be spent. 


In some cases, a city or state may be able to offer tax abatements on historic properties to incentivize the preservation of local historic landmarks and properties.


Who qualifies for a tax abatement?

Eligibility requirements vary depending on the state or municipality, but there are a few general guidelines to look for: 


  • Income stipulations: For new property owners, property taxes can have a significant impact, so a tax abatement can be applied for by the property owner or business entity and issued by the local government. When the business’s revenues begin to exceed the predetermined threshold, the abatement can be revoked. 

  • Improvement agreement: Some cities will grant abatements only after the buyer performs certain agreed-upon improvements to the land or buildings on the property. In some cases, the abatement might only be applied to the value of the renovations, rather than the entire value of the property. 

What’s the difference between a tax abatement and a tax exemption?

Tax abatements and tax exemptions have similar outcomes, but different procedures. While a tax abatement reduces the taxes owed on a property for a period of time, a tax exemption reduces the taxable value of the property, reducing the amount of taxes owed. 


What types of properties are excluded from eligibility for tax abatements? 

Nonprofits that are exempt from state and federal taxation cannot receive tax abatements since they are fully or partially exempt from property taxes. Most nonprofits designated under 501(c) tax code are tax-exempt, but their individual members are not, though there may be exceptions, depending on individual state laws.


Each state or municipality has its own set of eligibility requirements for tax abatements. Some districts only grant tax abatements to homes and multi-unit rental properties in which rental property owners would be required to apply for the abatement within 60 days of receiving building permits for the property. Others may grant abatements to new businesses with the intention of stimulating the local economy. Each area is different depending on what that specific area is in need of. 


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