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Heed new IRS warnings on hazardous waste costs

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in Small Business Tax,Small Business Tax Deduction Strategies

If you operate a manufacturing company and need to clean up land contaminated with hazardous waste, how do you treat the cleanup costs for tax purposes? The IRS clarified that issue in a new ruling last month. (IRS Revenue Ruling 2005-42)

You must capitalize those costs and allocate them to the inventory produced during the tax year the costs were incurred, as opposed to deducting the cost as a garden-variety business expense.

The new ruling details five situations in which land and ground water were contaminated with hazardous waste from production activities and the expenses do not qualify for any special research and experimentation tax breaks.

Since the costs don't materially add to the value of land, prolong its life or adapt it to a different use, they are "repairs" not capital improvements. That means you must treat them as indirect costs and include them in inventory costs.

Even though the IRS doesn't allow a current tax deduction, the news isn't all bad. Reason: You can recoup the deduction when you sell the inventory. In contrast, no tax benefit would be allowed if the costs were permanently capitalized into the cost of the land, until that land is sold.


Huddle with your tax pro to see how this new ruling affects your production activities.

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