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New Tax Rule Will Allow Deduction of Environmental Remediation Expenses

January 2001
By Marvin A. Kirsner, Greenberg Traurig, Miami Office

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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.

Marvin A. Kirsner
"[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 expenses.

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 sale.

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

Additional Information:

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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