How should payments in lieu of taxes be classified?

Payments in lieu of taxes (PILOTs) are financial contributions made by a non-profit organization or other entity that would typically be exempt from property taxes. These payments are often intended to compensate local governments for the loss of tax revenue due to the organization’s tax-exempt status. The classification of these payments can vary based on the perspective from which they are viewed.

When classified as an expense, PILOTs are treated as a payment made by organizations for utilizing public services, akin to taxes. This emphasizes the idea that these payments are a cost incurred by the organization in relation to its operations, reflecting an expense on its financial statements.

On the other hand, when considered as a transfer, PILOTs can be viewed as a way of redistributing funds from one entity to another, particularly when considering the financial support provided to local governments. This perspective underscores the purpose of PILOTs to alleviate some financial burden and contribute to public services, much like a transfer payment.

Choosing the classification of either an expense or a transfer acknowledges that PILOTs have attributes of both categories, as they effectively serve dual roles: representing costs to the contributing entity while also functioning as a financial transfer that benefits the local government. Thus, stating that payments in lieu of