Tax Abatements for Small Business Owners

small business taxes


Emilija Manevska / Moment / Getty Images

When Amazon recently announced its search for a second headquarters location, it took a year to consider all 230 locations in the running. Eventually, Amazon decided to split the second headquarters between Long Island City in New York City and Crystal City in Northern Virginia. Those locations won out over the long list of others for many reasons, but the tax abatement and credit opportunities were part of the deciding factors. With nearly 50,000 jobs and other economic growth factors on the line, it’s not surprising that Amazon was offered so many incentives.

Watching the competition for Amazon’s second headquarters, small business owners may have questions about how they can get similar treatment from their own cities. While you may not have the same economic power that Amazon can offer to a city government, small businesses can qualify for tax abatements, too.

What Is a Tax Abatement?

A tax abatement is a type of local government credit that eliminates or vastly reduces the amount of property taxes on a location. The abatement usually has a specific time limit on the credit. For example, some tax abatements will last for a year or two while others could be set in place for up for twenty or thirty years.

Tax abatements go with the property, not the person. So, if you were to sell that property to another party during the abatement period, the abatement would go to them. In many cases, this makes the property more valuable.

Buyers are willing to a pay a bit more in exchange for the credit because property taxes can increase year by year. Instead of paying the rising taxes, the buyer would pay more in the sale price once.

The city or county offering the tax abatement will often offer them to properties in certain areas, such as ones that are in need of vitalization or in historic areas. In some counties, an abatement is set aside for non-profit businesses. There also might be abatements specifically designated for certain types of businesses, such as those that will employ a certain number of people or provide a particularly scarce service or product.

Why Would a City Offer an Abatement?

Property taxes are levied on property owners at the local government level to pay for local government services, including but not limited to building and maintaining roads, paying for the police services and fire services, and funding public schools. Property taxes are one of the biggest sources of funding for local county or city governments. Areas with higher property values pay more in taxes and you can often see that schools and other public services offered in those areas. Failure to your property taxes can result in your property being seized by the government and sold for the tax debt.

Knowing all of that, it may be hard to reconcile the idea of tax abatements. Wouldn’t the city want that money for its funding? What does the city get out of waiving or reducing taxes for some properties?

When the city offers a tax abatement for a property, it expects to at least break even on the loss of tax income. That’s why abatements aren't offered to every business on every property. The city has to evaluate the monetary benefits of an abatement.

For example, Amazon building a second headquarters in an area means more jobs for current residents and rising property values for current owners. The city benefits through income taxes and rising property taxes on the properties around the one with the abatement. A new facility would use resources in the area, bringing business to other businesses, as well, which in turn means more revenue from sales tax. It’s worth a lot for a city to be home to something as big Amazon’s second headquarters. In that case, the city is hoping to gain more in the end by offering a tax credit to entice a business to the area.

Important Things to Consider

Before you buy a property with an abatement or apply for one, there are a few things to consider. First, abatements aren’t forever. What are the terms of yours? In some cases, it might be a time frame for the abatement to last. For instance, an abatement could be 40 percent the first year, with a 10 percent reduction in the abatement until the property taxes are being paid at full price. Others may be dependent on your business practices, such as the use of recyclable materials or maintaining a nonprofit status. If any of those things change, so does your abatement.

What will your tax responsibility be after the tax abatement ends? Truthfully, you can’t know the exact rate for sure since property tax rates can change from year to year. However, it’s a smart idea to calculate what the property tax currently is and review what paying it would do to your budget.

Other Tax Credits for Small Businesses

Can’t qualify for a tax abatement? You’re not alone. Plenty of small businesses rent their spaces. If you’re not buying property, a property tax abatement isn’t really applicable.

Don’t give up yet, though. There are other tax credits your small business may qualify for. There are some for running your business with a more energy efficient or environmentally friendly mission, such as the Business Energy Tax Investment Credit. There are also credits for using hybrid or electric vehicles in the course of running your business. Don’t forget the ones for small business healthcare or for making accommodations for disabled customers. There are even research and development credits for product development and improving business performance.

The first step in claiming available small business tax credits for yourself is to talk to your tax professional. You want to get good, actionable advice from someone who knows what he or she is talking about. Explain that you’re looking to take advantage of any tax credits your business could qualify for and let the expert guide you in how to do that.

The sooner you have the conversation, the better. Tax credits apply to money you’ve already spent so you’d have to plan ahead to take advantage of them.