IRS disallows deductions for asbestos removal.

• Author: Rocheleau, Dean A.
• Position: INDOPCO, part 2

Significant environmental legislation and administrative regulations promulgated during the 1980s and 1990s brought the issue of asbestos removal to the forefront of the business, legal and accounting communities. The Occupational Safety and Health Administration (OSHA) promulgated regulations in July 1986, which provided that significantly reduced levels of asbestos would be tolerated in the workplace, and many states have imposed similar restrictions. Consequently, businesses have begun spending significant sums to comply with these guidelines.

There has been considerable uncertainty concerning the proper tax treatment of costs associated with removing or encapsulating asbestos in order to comply with the OSHA regulations and applicable state laws. Many believe that such costs should be currently deductible under general tax principles applicable to ordinary repairs and maintenance, and that such a result is consistent with sound tax policy (i.e., to promote compliance with state and Federal guidelines). Unfortunately, the IRS does not agree. In its first official pronouncement on the subject, the Service issued Letter Ruling (TAM) 9240004, which held that asbestos removal costs are not deductible as ordinary repairs and maintenance, but instead must be treated as capital expenditures.

A businessman or investor who desires to modify or sell real or personal property containing asbestos must either encapsulate and continuously monitor the asbestos to ensure that permissible exposure levels are maintained, or undertake a program to remove the asbestos and properly dispose of it. If a taxpayer decides to remove the asbestos and replace it with a substitute insulating or fire retardant material, the taxpayer arguably has three choices for treating these costs: (1) Deduct both the cost of the asbestos removal and the cost of installing its replacement in the year the costs are incurred; (2) capitalize all of these costs and depreciate them over the appropriate modified accelerated cost recovery system (MACRS) period for the particular asset to which the costs relate (e.g., 31 1/2 years for nonresidential real property); or (3) as a middle ground, currently deduct the costs associated with the asbestos abatement, but capitalize the costs associated with installing the replacement insulation.

From a public policy standpoint, the first alternative would seem the most appropriate. As noted, the Federal government and many states have passed laws...