Any business spending money on an environmental investigation or on clean up at property they own examine closely a federal tax incentive which is set to expire December 31, 2009.  The incentive allows environmental clean up costs to be fully deductible in the year they are incurred, rather than having to be capitalized and spread over a period of years. 

Some businesses may not look closely at that tax incentive because they don’t think they own a "brownfield" property.  Many conjure images of falling down and abandoned manufacturing buildings when they think of a brownfield.  However, the incentive, known as the Federal Brownfields Tax Incentive, is very broad and inclusive as to what constitutes eligible properties.  Properties in full productive use with contamination can be eligible.

Until 2000, the Federal Brownfield Tax Incentive did include restrictions on which properties could be eligible.  The law included requirements on specific land use, geographic and contamination requirements for determining eligible properties.  However, most of these limitations were removed in 2000. 

Section 198 of the Internal Revenue Code contains the requirements for expensing environmental remediation costs.  Section 198 defines "qualified contaminated site" as the following:

The term "qualified contaminated site" means any area-

(A) which is held by the taxpayer for use in a trade or business or for the production of income, or which is property described in section 1221(a)(1) in the hands of the taxpayer, and

(B)  at or on which there has been a release (or threat of release) or disposal of any hazardous substance.

(Note: sites on the National Priorities List are excluded from eligibility)

The two requirements set forth in Section 198 are not very limiting, potentially allowing any property to be eligible that is held by a business upon which contamination is present.  Any business looking to qualify their property as eligible must obtain a statement from the designated state agency (typically the State EPA where the property is located) that there has been a release, threat of release, or disposal of a a hazardous substance at or on the property. 

Clean ups at former gas stations or  those involving underground storage tanks containing gasoline now also potentially qualify.  In 2006, the tax incentive was further expanded to include contamination from petroleum products (e.g., crude oil, crude oil condensates, and natural gasoline). 

What types of expenses are deductible? Generally speaking, any expenses incurred in connection with abatement or control of hazardous substances, including:

  • Site assessment and investigation;
  • Site monitoring;
  • Clean up costs;
  • Operation and maintenance costs;
  • State voluntary cleanup program oversight fees; and
  • Removal of demolition debris

While the incentive was extended at least three times since 1997, it is set to expire on December 31, 2009.  If the incentive provides advantages to your business it may make sense to consider managing your clean ups in the remaining months to maximize its benefits before it expires.  Also, note that it is possible previously filed tax returns can be amended to include deductions for past clean up expenditures.

U.S. EPA has a very useful fact sheet and answers to frequently asked questions on their website that provide further guidance on the incentive. 

[Disclaimer: You should consult your environmental counsel, CPA and tax counsel to determine whether your specific circumstances would qualify for the Federal Brownfield Tax Incentive]

[Photo: in Van Nuys]