Greenberg Traurig Alert
New Tax Rule Will Allow Deduction of Environmental Remediation Expenses
By Marvin A. Kirsner, Greenberg
Traurig, Miami Office
View or download the PDF version of this Alert
A significant change to the tax treatment of environmental remediation
expenses was passed by the 106th Congress on its last day in session that
should have positive tax consequences to most property owners engaged in
an environmental remediation project.
|"[In this example], the $500,000
expenditure under the new provision would save the owner close to
$200,000 in tax dollars..."
As part of the Community Renewal Tax Relief Act of 2000, Congress included
a provision which amends Section 198 of the Internal Revenue Code which
will now allow for current expense deductions for environmental remediation
Prior to this change, any environmental remediation expenses were required
to be capitalized, rather than currently deducted, unless the property subject
to the remediation was located in certain low income areas or a designated
Brownfields Pilot Project. This limitation severely restricted the ability
to deduct remediation expenses for most properties.
If remediation expenses are required to be capitalized, as required by
existing law, this would result in an increase in the basis in the remediated
property, rather than a deduction that would reduce current tax liability.
Since land cannot be depreciated, there would be no tax benefit at all from
the remediation expenditures until the property is actually sold.
For example, assume that an owner purchased real estate for $1,000,000
and was required to do $500,000 of remediation work. Under the existing
law, he would not be able to deduct the $500,000 in remediation expenses,
but would have to add the expenditures to his cost of the land, and his
basis would now be $1,500,000. Because land is not subject to depreciation
deductions, the owner would only be able to recover this expenditure when
the land is sold, when the additional basis would reduce his gain on the
Under the new provision, remediation expenses can be currently deducted
provided (1) the property is used in a business or held for investment and
(2) a statement is obtained from the State Environmental Agency certifying
that there has been a release, or threat of release or disposal of any hazardous
substance on the property. If these requirements are satisfied, then any
expenditure which is paid or incurred in connection with the abatement or
control of hazardous substances is currently deductible.
Using the same example as above, the $500,000 expenditure under the new
provision would save the owner close to $200,000 in tax dollars (assuming
the top federal income tax rate).
The effective date of this new provision is the date of the enactment
of the Community Renewal Tax Relief Act of 2000. President Clinton signed
this bill on December 21. Accordingly, any expenditures incurred after this
date would be subject to the new favorable tax treatment, provided that
the required statement is obtained from the State Environmental Agency.
Owners might consider allocating more costs in a contract to clean up
hazardous waste when there is also non-hazardous waste on the property,
since only the cost of the clean up of hazardous waste is eligible for this
special tax treatment.
If you would like to discuss obtaining such certification from your State
Environmental Agency, please contact a Greenberg Traurig attorney.
© 2000 Greenberg Traurig
For more information, please review our Tax Practice or Environmental
Practice descriptions, or feel free to contact one of our attorneys.
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