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'

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.

RELATED TERMS
  1. Form 843: Claim For Refund And ...

    Form 843: Claim for Refund and Request for Abatement is a tax ...
  2. Property Tax

    Property tax is an ad valorem tax assessed on real estate by ...
  3. Effective Tax Rate

    The effective tax rate is the average rate at which an individual ...
  4. Tax Year

    Tax year refers to the 12-month period covered by a taxpayer's ...
  5. Net of Tax

    Net of tax is an accounting figure that has been adjusted for ...
  6. Tax Break

    A tax break is a savings on a taxpayer's liability. It is also ...
Related Articles
  1. Taxes

    Taking Advantage of Property Tax Abatement Programs

    Increase your home's value without increasing your property taxes.
  2. Taxes

    The 7 Best States For Property Taxes, and Why

    Understand why some states have high property taxes while others have low property taxes. Learn about the states with the lowest property taxes.
  3. Taxes

    5 State Tax Issues For When You Leave the Military

    When you're budgeting for post-military life, certain state tax issues need to be considered.
  4. Taxes

    Taxes: Who Pays And How Much?

    When it comes to taxes, the debate is endless on who pays what, especially in Congress. With no new initiatives in sight, let's take a look at who is paying now.
  5. Taxes

    How Tax Cuts Stimulate the Economy

    Learn the logic behind the belief that reducing government income benefits everyone.
  6. Insights

    Apple Plans $1 Billion Expansion in Nevada

    By doubling the size of its data center, Apple can better cater to surging demand for iCloud storage and enjoy tax breaks.
  7. Insights

    A Concise History Of Changes In U.S. Tax Law

    We look at how U.S. taxes have changed since their inception.
  8. Taxes

    Use Tax Vs. Internet Sales Tax: How Are They Different?

    Learn about the differences between a use tax and an Internet sales tax. Find out about transactions in which the taxes apply, and to whom they apply.
  9. Taxes

    The History Of Taxes In The U.S.

    The number of taxes that we now consider a given did not always exist. Find out how they arose.
  10. Taxes

    10 Best States for Property Taxes in 2016

    Whether you are thinking of moving or just curious to see whether your state is in the top 10, these rankings are eye-opening.
RELATED FAQS
  1. What is the difference between a state income tax and a federal income tax?

    Learn the difference between state income tax and federal income tax based on tax rates, deductions, tax credits and taxable ... Read Answer >>
Trading Center