Right now, the development of any commercial property is a challenge. That challenge is amplified when environmental contamination enters the picture. While attorneys and consultants can address the liability and technical issues associated with brownfields, landowners often have difficulty funding these properties.
State and federal governments provide an array of funding mechanisms, including tax deductions and tax credits. One often overlooked opportunity 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. Also, some states offer remediation tax credits to landowners to offset state tax liabilities.
Brownfields Tax Incentive
Congress initially enacted the Brownfields Tax Incentive (Section 198 of the Internal Revenue Code) in 1997 to allow a taxpayer to claim eligible cleanup 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, rather than capitalizing the costs. Generally, if costs are ordinary and necessary business expenses, the taxpayer may deduct the expense. If costs increase the useful life of an asset or result in a permanent improvement to the property, the taxpayer must capitalize the expense.
One prerequisite to using Section 198 is that the cost must be an eligible expense. Eligible expenses include costs resulting from site assessment and investigation, site monitoring, cleanup costs, operation and maintenance costs, state voluntary cleanup 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’s list of Superfund sites are not eligible to use Section 198. To claim the deduction, a designated state agency must verify 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 expired 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 cleanup expenditures.
State Tax Credits
Some states provide funding mechanisms to encourage cleanup and reuse of contaminated properties. For example, Colorado offers a maximum $100,000 income tax credit per property to taxpayers who redevelop contaminated properties under the Colorado Voluntary Cleanup Program. If the tax credit exceeds the taxpayer’s tax liability, the taxpayer can roll the credit forward into the next tax year.
Eligible costs include direct cleanup costs, permitting costs specifically required as a result of the cleanup actions, cleanup monitoring and verification, and other administrative costs. Eligible expenses 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 it must 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 properties. To be eligible, 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 estimate 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.
Although contaminated properties continue to present owners with challenges during development, state and federal incentives can provide funding options to offset environmental remediation expenses and keep projects moving forward.
Friday, December 13, 2013