Act 198 Tax Abatements: How to Get the Government to Pay for Your Industrial Property Improvements.

Do you want FREE MONEY to invest in your business? While this may sound like a late-night infomercial pitch, the reality is that both local and State governments want to stimulate investment in the community and will provide financial incentives for you to do so. I have previously written about brownfield incentives and how a business owner can leverage these financial benefits to essentially have the government subsidize a new development project. So-called Act 198 tax abatements are another opportunity to leverage public funds to subsidize capital improvements to your industrial facility.

In Michigan, Public Act 198 of 1974 gives a tax incentive to businesses who build new plants, expand existing facilities, renovate aging infrastructure, or add new machinery or equipment. High-technology operations, such as biotech, computing, robotics, etc., are also eligible. The incentive is a whole or parties tax abatement or a “tax freeze” for a period of up to 12 years. In other words, real and property taxes are “frozen” at their current levels and the improvements do not result in increased taxes until the end of the abatement period. Of course, at the end of the abatement period, the tax base is oftentimes lower due to depreciation, resulting in significant tax savings on the investment.

As an example, I recently represented a medical equipment manufacturer in the metro Detroit area. The manufacturer was investing nearly $10 million to upgrade three existing manufacturing and distribution buildings, as well as to build a new connector building with advanced facilities. Clearly the $10 million investment in property and equipment would have significantly increased the manufacturer’s property value and tax liability. However, I was able to secure an Act 198 resolution from the local government unit, and upon approval of the State Tax Commission, the manufacturer saved millions of dollars in abated taxes. Not only did the improvements pay for themselves–the legal fees were paid for as well!

Whether your facility is eligible, how much you will save, depend on your particular business and the municipality where your business is located. The Michigan Economic Development Corporation has a concise summary of the various requirements and the process here. In general, the process starts with the local government unit designating a special district for the investment through its normal legislative process. After that, the business can apply for the abatement by submitting a comprehensive application, which outlines the nature of the investment, the dollar value of the improvements, plans, timeline, and other details. There is then another hearing, where the local legislative body makes the decision whether to approve or disapprove the application, and specifically determines the period of time for the abatement (a maximum of 12 years). Importantly, the application must be approved no later than 6 months after the start of the project, and in addition, the State Tax Commission must also approve the application.

When considering tax incentives to help with financing, it is critical to retain an experienced attorney who not only knows the requirements of an Act 198 application, but is also familiar with the local municipality, its legislative body, and the relevant administrator in charge of designating the special district. When it comes to dealing with local government, relationships and familiarity with the process go a long way towards approval.

Dan Artaev is an experienced metro Detroit attorney who counsels business owners, including with respect to securing tax abatements and other governmental financial incentives for their facilities. Contact Dan at dartaev@fb-firm.com or 248-380-0000.

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