It may have flown under the radar, but the 2010 Tax Relief Act extends a key tax break for cleaning up hazardous materials on business property.
Strategy: Finalize plans required for a cleanup. If you qualify, you can write off expenses incurred before year-end.
This “brownfields deduction” is currently scheduled to expire after 2011. It’s been extended several times in the past, but there’s no guarantee it will happen again.
Here’s the whole story: Normally, a business can’t take a current tax deduction for environmental cleanup expenses. Instead, the costs must be capitalized and written off over a period of time, sometimes as long as 30 years. But the special brownfields tax incentive encourages cleanup and redevelopment of contaminated property by allowing taxpayers to reduce their taxable income by the cost of their cleanup expenses in the year the expenses are incurred.
There are three key requirements:
1. The property must have been owned by the taxpayer when the contamination occurred and have been used in a trade or business or for the production of income.
2. Hazardous substances or petroleum contamination must be present, or potentially present, on the property. (Note: In 2006, Congress broadened the definition of hazardous substances for this purpose to include petroleum products.)
3. Taxpayers must obtain a confirmation statement from a designated state agency. Typically, this is a state environmental agency overseeing the state’s voluntary cleanup program.
If you meet those requirements, here’s what you have to do to secure the brownfields deduction:
- After you determine that a hazardous substance or petroleum contamination is present, or potentially present, on the property, prepare for the cleanup and redevelopment project.
- Contact the designated state agency to inquire about procedures for obtaining a statement that confirms the property is a brownfields site. Provide the agency with documentation showing that hazardous substances or petroleum contamination are present, or may be potentially present, on the property.
- Obtain the statement of eligibility from the state agency. In most cases, the review process is quick.
Tip: Be aware that you must recapture income attributable to the deduction as ordinary income, rather than capital gain, if the property is sold later. Check with your tax pro on the details.
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