Federal, state, and local tax incentives for environmental remediation costs.

• Author: Alberte, Thomas J.

Federal, state, and local governments offer numerous tax incentives to promote the cleanup of environmentally contaminated properties. This item provides a high-level overview of the most common incentives that are offered and a brief update of the federal rules regarding the expensing of environmental remediation costs.

Federal Tax Incentives

The primary federal tax incentive--available since August 5, 1997--has been to allow the expensing of environmental (or "brownfield") remediation costs that would normally have to be capitalized (Sec. 198). However, these rules recently expired and do not apply to costs incurred after December 31, 2007. As a result, unless Congress extends the expiration date or makes Sec. 198 permanent, these costs will have to be capitalized under Sec. 263(a).

With the expensing option no longer available for costs paid or incurred after December 31, 2007, taxpayers will now have to more closely analyze their environmental remediation costs to determine whether there are still some costs that can be expensed under Sec. 162. In making this determination, these expenditures will now be subject to the same expensing/capitalization rules as other expenditures. Also, even if these expenditures are allowed to be currently expensed under Sec. 162, they might still have to be included in inventory under the uniform capitalization rules of Sec. 263A (Rev. Rul. 2004-18).

A number of federal cases and rulings have shed some light on whether environmental remediation costs are currently deductible or have to be capitalized. In the absence of Sec. 198, these should be reviewed in order to determine the appropriate treatment of costs. (See Key. Rul. 94-38; Rev. Rul. 2004-18; Plainfield-Union Water, 39TC 333 (1962).)

Prospects for extension: Although several bills were introduced in 2007 that would make the Sec. 198 brownfields tax incentive permanent, none of these bills has been considered by the House Ways and Means Committee. The president's fiscal year 2009 budget proposal also includes a provision to permanently extend the expensing of brownfield remediation costs.

State Tax Incentives

Many states provide tax and non-tax incentives to encourage brownfield and environmental cleanup. The most common types of tax incentives include:

* Current expensing of capitalizable remediation costs;

* Income tax credits;

* Property tax abatements and exemptions; and

* Tax incremental financing.

Environmental Remediation Cost Expensing

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