DEFINITION of Abatement
Abatement is a reduction in, or an exemption of, the level of taxation faced by an individual or company. Examples of an abatement include a tax decrease, a reduction in penalties or a rebate. If an individual or business overpays its taxes or receives a tax bill that is too high, it can request an abatement from the tax authorities.
Abatement is a taxation strategy usually used by various governments to encourage specific activities, such as investments in capital equipment. A tax incentive, for example, is a type of tax abatement.
Two Examples of Tax Abatement
Often, a local government wants to attract or keep businesses in its community. To achieve this, the government can offer a tax abatement in the form of a temporary reduction in general business taxes. For example, the Ratner Steel Company was given a tax abatement from the city of Portage, Indiana, giving the company the ability to purchase a $2.5 million steel cutter. The abatement stipulates that the company pays no taxes on the equipment in the first year, and is responsible for the total tax amount only after the five-year period is finished. In return, the company is going to expand its plant in Portage and add 30 new jobs.
Another common scenario of tax abatement is property tax abatement. If an individual believes that the assessed value of his property is too high, he can appeal to his local tax assessor for an abatement. Some localities offer property tax abatement to owners who restore or improve historic properties in designated neighborhoods. Some types of properties, such as those containing nonprofit businesses, can be granted tax abatements based on the owner's tax-exempt status.
Benefits of Tax Abatements
Usually, a government only offers a tax abatement when a business or individual provides it something of high value for the community. For example, a city government may give a tax break to a business in return for an investment in the city, such as a new retail location, factory or warehouse.
This provides the added benefit of increased jobs in the area. If Target Corporation is given a tax abatement on property taxes, and in return the company builds a retail location in the local community, it ends up adding many job opportunities. Additionally, it increases public good by adding convenience to the city.
A company that benefits from a tax abatement might invest in local infrastructure. A new company may need to increase the amount of roadways, water lines or power lines in the area in order to operate efficiently. While this benefits the company itself, it also benefits the community where the added infrastructure is built.
If cities want to develop land, they can designate development zones. These zones give tax abatements to any housing development in the area, incentivizing people to build homes.