Developing property that has been environmentally contaminated by historic uses is significantly challenging. While attorneys and consultants can address liability and technical issues, owners have difficulty finding funds to address these properties (known as brownfields). State and federal governments provide a wide array of funding mechanisms, including tax deductions and tax credits. One benefit that has often been overlooked is the use of Section 198 of the Internal Revenue Code. This section permits landowners to take a deduction in the year they pay for certain qualified remedial expenses rather than capitalizing those expenses.
Generally, if costs increase the useful life of an asset or result in a permanent improvement to the property, the taxpayer must capitalize the expense. Congress initially enacted the Brownfields Tax Incentive in 1997 (Section 198 of the Internal Revenue Code) to allow a taxpayer to claim eligible clean-up costs that are incurred to abate or control hazardous substances as a current business expense in the year in which the taxpayer incurs or pays the expenses.
One prerequisite to use Section 198 is that the cost must be an eligible expense. Eligible expenses include costs resulting from site assessment and investigation, site monitoring, clean-up costs, operation and maintenance costs, state voluntary clean-up program fees, and removal of demolition debris. Moreover, the taxpayer must incur the expense for use in a trade or business, or for the production of income – or the taxpayer must include the property in the taxpayer’s inventory. Sites on the Environmental Protection Agency list of Superfund sites are ineligible for use of Section 198. To claim the deduction, a designated state agency must verify that there has been a release, threat of release, or disposal of any hazardous substance at or on the property. Usually, the designated state agency is the department responsible for environmental protection. Although the tax incentive’s current expiration date is Dec. 31, 2009 (legislation is pending to make the benefit permanent), taxpayers may be able to amend previously filed tax returns to include deductions for past clean-up expenditures.
Some states provide funding mechanisms to encourage clean-up and reuse of contaminated properties. For example, Colorado offers an income tax credit to taxpayers who redevelop contaminated properties under the Colorado Voluntary Cleanup Program. This tax credit provides a taxpayer with a maximum credit of $100,000 per property. If the tax credit exceeds the taxpayer’s tax liability, the taxpayer can roll the credit forward into the next tax year(s). Eligible costs include direct clean-up costs, permitting costs specifically required as a result of the clean-up actions, other administrative costs related to clean-up and clean-up monitoring, and verification. Eligible costs do not include overhead, costs of permits that would have been required even if the property was not contaminated, and costs to prepare completion and tax credit application reports. To qualify for the tax credit, the property must be located in a municipality with a population of at least 10,000, and be eligible for inclusion under Colorado’s Voluntary Cleanup and Redevelopment Act. This state tax credit expires Dec. 31, 2010.
Missouri also offers a financial incentive to encourage eligible applicants to remediate property. To be an eligible applicant, the owner cannot be the party responsible for the release of hazardous substances at the property, the city or county must endorse the project, the project must be accepted into the state Voluntary Cleanup program, and the state must project that the project will create at least 10 new jobs or retain 25 jobs. The state may issue tax credits for up to 100 percent of the remediation costs, and the owner may use the credits to offset Missouri income tax liability in the year the state issues the credits or over a 20-year period. Alternatively, the owner can sell or transfer the credits. Also, the state may issue credits for up to 100 percent of the non-remediation demolition costs. Generally, demolition tax credits are not transferable; however, in some instances, non-remediation demolition costs that are necessary to accomplish the plan for the property are transferable.
Contaminated properties have presented owners with challenges during development; however, state and federal incentives now provide owners with funding options to offset environmental remediation expenses. A taxpayer should consult his/her qualified tax professional to determine applicability to his/her project.
Jon Steeler is a partner at the Denver law firm of Isaacson Rosenbaum. Christine Hayes is a partner at Isaacson Rosenbaum (www.ir-law.com).