United States
Environmental Protection
Agency
Office of Solid Waste &
Emergency Response
(5101)
EPA 500-F-99-164
September 1999
vvEPA
Brownfields Tax
Incentive Guidelines
t,SW
EPA
500-
F-
99-164
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Backgrc und
The U.S. Ei vironmental Protection Agency (EPA) is committed to helping revitalize former industrial or
commercial areas that were abandoned due to concerns about environmental contamination. EPA and its federal
partners bel eve that, with the right incentives, these former engines of industrial growth can once again generate
value for bo h the private and public sectors.
These areas ire "brownfields," which EPA defines as "abandoned, idled, or under-used industrial and commercial
facilities wh :re expansion or redevelopment is complicated by real or perceived contamination." These properties
may be large or smalt; urban or rural; former factories or warehouses. They have all been left idle due to concerns
about cleanup costs and legal liabilities.
On the publi: sector side, economic development officials recognize that redevelopment can lead to a wide variety of
public benefits, including reduced blight, new jobs, lower crime rates and higher tax revenues. Private sector
companies h ive also seen the advantages of brownfields redevelopment. Many of these sites are located in areas
with strong i ifrastrucrure, transportation and urban markets.
To encourag< this new interest in brownfields, EPA, the Department of the Treasury, and its other Federal partners
have created incentives for potential developers. One of these is the Brownfields Tax Incentive, signed into law by
President Cli iton as pan of the Taxpayer Relief Act on August 5, 1997. Under the tax incentive, certain
environment; 1 cleanup costs at targeted sites may be fully deducted by eligible taxpayers in the year in which they
are incurred. The Treasury' Department estimates that the $0.3 billion incentive will leverage $3.4 billion in private
investments *nd return some 8,000 brownfields to productive use.
This tax incentive is one of many federal initiatives to encourage business development and commercial economic
revitalization Programs exist that address a multitude of issues, including expanding access to capital, small
business techi lical assistance, and workforce training and hiring incentives, and business owners should review the
full range of i litiatives that can turn a brownfields into an attractive business location.
An Introduct on to Tax Incentives
The Brownfie ds Tax Incentive is not a tax credit, but reduces your tax burden indirectly by lowering your taxable
income. The incentive does this by allowing you to claim many eligible cleanup costs as a current expense, rather
than capitalizing them as long-term assets. Companies prefer deductions, because this substantially reduces their
current incom:, allowing them to capture the tax savings now rather than later.
In the past, en ironmental cleanup costs had to be capitalized in some circumstances but not in others. In response
to this problen , the Brownfields National Partnership worked together to "level the playing field." Under the
Brownfields T ix Incentive, companies conducting a cleanup in certain areas may now deduct some expenses.
Additionally, companies operating at a loss in the first years of business may use the tax incentive to establish a "net
operating loss' that may be applied in future taxable years.
What's in Ttuse Guidelines
The next few p ages of this guide will help you determine whether your property may be eligible to take advantage of
the Brownfield; Tax Incentive. This step-by-step guide covers:
• A fictional ca se study to show you the potential benefits of the incentive
• A description of the types of taxpayers that may use the tax incentive
• Suggestions f >r how to find out whether your property is in a targeted area
• Guidelines or the types of eligible cleanup deductions you may take
• Instructions en how to seek state verification of property and contamination eligibility
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The Brownfields Tax Incentive: A Fictional Case Study
The following fictional example is designed to show you how the Brownfields Tax Incentive could create value for
your company. In the short run, eligible companies that use the incentive can gain a large cash infusion up front,
which can be used to finance the cleanup or generate higher long-term returns because they have opted to reinvest
some of their savings into other projects. Companies can also realize long-term benefits from the tax incentive.
By changing the timing of their tax payments, companies that use the incentive can reduce their total tax burden in
real terms
Both the scenarios and the assumptions used in the following fictional case have been simplified to provide readers
with an easy analysis of the types of returns that could be achieved through use of the incentive. Your project will
have different levels of savings, depending on your circumstances.
Acme Company
The fictional Acme Company wants to locate its new factory on a plot of land in an inner
city neighborhood. The Company hopes to employ local workers at the facility,
generating both new jobs and income for the community. While the plot is large enough
for the new factory, it is contaminated with PCBs. If one assumes that the Company will
clean up its property at a particular cost, and that this cost may be "expensed" in the year
in which it is incurred, then the Company will save dollars commensurate with its
corporate tax rate.
Scenario 1 - Up-front Cash Infusion
Expensing cleanup costs in the year incurred will reduce the net income on which tax is paid. In this way, a
smaller portion of Acme's profit will go to pay taxes. The savings incurred can then be used to defray the costs of
the new factory and/or additional investment in company infrastructure and productivity.
From an economist's perspective, the value of Acme's redevelopment project is increased by the first year savings
and earnings on this savings as measured by the time value of money. Even if the savings could be realized over
time, today's dollars are worth more than future dollars
Additionally, a new company with large up-front costs or an ongoing concern contemplating a significant
investment may use the tax incentive to create a net operating loss. The net operating loss can be deducted by
carrying the loss back 2 years when the business had profits or forward 20 years and deducted from future profits.
Scenario 2 — Lower Real Tax Burden
Another way to view Acme Company's savings is by realizing that the actual value of the taxes paid is affected by
when the payments are made. Thus, by realizing tax savings in the first year, Acme savings will be impacted over
the usable life of the improved property by inflation. Due to inflation, dollars saved in the present year are worth
more than would be the dollars saved in the future years if the costs were amortized rather than expensed. Thus,
Acme's tax burden, in real terms, is lower if it uses the incentive.
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Step 1; Determinewhether you meet the taxpayer requirements.
The pi operty must be "held by the taxpayer." This definition includes outright ownership. However, some
types o "long-term lease arrangements may qualify. If there is a question, taxpayers should consult with their
tax COD nsel to determine whether their circumstances qualify.
The ta [payer must hold the property for business or income generation purposes. This may include trade
or busi: >ess property, investment property, or property held as inventory. This does not include personal use
propert,'.
Step 2; Find out whether your property is located in one of the targeted areas.
The Brownf elds Tax Incentive is designed to create economic growth in disadvantages! areas by encouraging the
redevelopnu nt of brownfields. The incentive primarily targets regions with low household income levels, as well
as areas with a historical commitment to brownfields redevelopment. Sites on the National Priorities List are
ineligible.
Eligible projerty must fall into at least one of the four categories designated below:
Census' racts with a poverty rate of 20% or more.
Census 1 racts with populations of less than 2,000 people. More than 75% of the tract must be zoned for
commei cial or industrial use, and the tract must be located next to other census tracts with poverty rates
of 20% )rmore.
All Fedt rally designated Empowerment Zones or Enterprise Communities.
EPA Brnvnfields Pilot sites designated prior to February 1997.
When detent ining eligibility based on census data criteria, you must use 1990 census data. Data from other more
recent census samples is not permitted under the Brownfields Tax Incentive, which requires the use of the data
from the last decennial, or ten-year, census.
If your propei ty lies only partially in one of the four areas, you may qualify for a partial tax incentive. Taxpayers
may receive a partial deduction covering those eligible costs incurred in cleaning up those parts of the property that
fall in a quali ying area.
Additional inibrmation about each of these programs is included in Table 1.1, "Property Eligibility Requirements,"
on the follovvi ig page. This table also includes instructions on how to use various free on-line resources to
determine whither a given property qualifies. If you do not have World Wide Web access, please call (202) 260-
4039 to get fu ther assistance from the staff at EPA's Brownfields Office. In addition, you may also call HUD's
Community CDnnections Service at (800) 998-9999.
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Table 1.1
Property Eligibility Requirements
Qualifying area
How to tell if your property qualifies
Census tracts with a
poverty rate of 20% or
higher
Step 1: Determine in which census tract the property is located. The Federal Financial
Institutions Examination Council web site allows you to look up census tracts given a street
address or zip code for free, http://wivw.ffiec.gov/geocode/
Step 2: Determine the poverty rates within that census tract. The Census Bureau web site
provides state-by-state lists of census tracts with poverty rates of 20% or more. The information
is at: http://www.ceiisus.gov/ftD/Diib/housing/tracts/. HUD's Community Connections can
also help you with this at (800) 998-9999.
Census tracts with
populations of less than
2,000 people; more than
75% of the tract zoned for
industrial use; and located
next to census tracts with
poverty rates of 20% or
more.
Step 1: Determine in which census tract the property is located. Follow the instructions on
Step 1 above to look up the census tract.
Step 2: Find out whether the population level in the tract is less than 2,000 people. The
Census Bureau web site posts lists of the population in each census tract, organized by state at
http://www.census.gov/geo/www/ezstate/DOvcrty.html. HUD's Community Connections can
provide you with this list at (800) 998-9999.
Step 3: Contact your local planning office Your local planning office can tell you about how
the tract has been zoned, as well as what other tracts border your census tract. Once you identify
those tracts, you can use Step 2 above to determine whether they meet the poverty levels.
U.S. EPA Brownfields
National Demonstration
Pilots'
Step 1: Identify whether your city, county, or state is one of the 75 eligible Brownfields
Pilots. The EPA lists these at httD:/Avww.epa.gov/brownfield5/html-doc/list st.htm. You can
also call HUD's Community Connections at (800) 998-9999 to receive a copy of the list.
Step 2: Determine whether the property falls in the boundaries of the pilot area. Contact
the manager of the pilot project to discuss whether the property is eligible. Pilot managers are
listed on the EPA web site at: http://wmv.eDa.gov/browTifields/contacts.htm
Federally designated
Empowerment Zone or
Enterprise Community2
Step 1: Determine whether the property falls in a federal EZ or EC area. The Department
of Housing and Urban Development provides a free search engine that allows you to check
whether an address is within the boundaries of a federal Empowerment Zone or Enterprise
Community at http://www.lm d.gov/czec/1 oca tor/. You can also obtain this information by
calling HUD's Community Connections service at (800) 998-9999.
' The Brownfields National Demonstration Pilot Program was created by US. EPA in 1995 to help cities spur brownfields redevelopment. Cities, states and Indian Tribes
have receivKl £200,000 in funding to identity and asses sites and carry out other activities to facilitate brownfields redevelopment. Under the program, pilot managers
designate certain areas within the city or state that are considered to be official pans of the project. Properties mist fall within these to be eligible for the tax incentive. In
addition, the properties must have been designated as part of the project in the city's initial agreement with the EPA
!The EZ/EC Program is run by the Department of Housing and Urban Development and the Department of Agriculture The program uses a wide variety of tax incentives
and performance grants to create jobs and business opportunities in economically distressed areas across the country. More information on the program is available at
l orwww.eiccgov.
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Step 3; Find out which cleanup costs may be deducted.
In general, a property is eligible for the tax incentive if it is an area at or on which there has been:
A releas; or threat of release of a hazardous substance, or
Disposal of a hazardous substance
However, the property must not be listed or proposed for listing on EPA's Superfund National Priorities List. The
expenses associated with the cleanup must occur after August 4, 1997 and before January 1, 2001.
What constitites a release or a threat of release?
A release um!er the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA)
includes spilling, leaking, pumping, pouring, emitting, emptying, discharging, injecting, escaping, leaching,
dumping or c isposing of hazardous substances into the environment. The "environment" under CERCLA includes
surface water ground water, ambient air, and land, but does not include indoor areas. Therefore, for a release or a
threat of rele; se to exist, it must involve or threaten the outdoor environment.
What is a ha; ardous substance?
The Brownfu Ids Tax Incentive defines "hazardous substance" as any substance that is defined under CERCLA.
The list of CIRCLA hazardous substances can be found at 40 CFR §302.4, Table 302.4. However, the
Brownfields "ax Incentive excludes products that are part of the structure of a building and result in exposure
within that bi ilding (e.g. interior lead-based paint or asbestos that results in indoor exposure) from its definition of
a "hazardous substance," even if that substance is listed on Table 302.4. In addition, petroleum is not a "hazardous
substance."
To determine whether a particular substance is a "hazardous substance." you should consult an environmental
attorney. U.S EPA Regional offices may be a source of information on defining a hazardous substance.
What expense 5 are eligible?
Generally, tax payers may deduct those expenses that are paid or incurred in connection with the abatement or
control of hazardous substances. For example, the costs of building an access road could be eligible if they were
paid or incurr ;d in connection with the abatement or control of hazardous substances, but not if it would just speed
construction o f a new building. If a taxpayer acquires otherwise depreciable property in connection with such an
activity, the pioperty's cost will not be immediately deductible, but may be expensed over the life of the property.
Absent the Br >wnfields Tax Incentive, such depreciation would not be allowed.
Types of eligiMe expenses include:
Site assea ment and investigation
Site moni oring
Cleanup casts
Operation > and maintenance costs
State volu itary cleanup program oversight fees
Removal (f demolition debris
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Step 4; Ask your state for a statement that YOU are eligible for the tax
incentive.
Before the IRS will accept the deduction, a designated state agency must provide you with a statement that the
property meets the geographic and contamination criteria described above. You can find your state's designated
agency by consulting Table 1.2 on the following page. If you need further assistance, you can visit the EPA's web
site at http://www/epa/gov/hrownfields/contacts.htrn. or call EPA's BrownfieJds Office at (202) 260-4039.
HUD's Community Connections service may also be able to help you at (800) 998-9999.
Each state agency will have a different application process and documentation requirements. For example, the
state may require one or more of the following:
a letter from the appropriate municipality certifying that the property meets the industrial zoning criteria
reports or photographs from Phase I or Phase II environmental site assessments
an affidavit detailing a release or a threat of a release of a hazardous substance at an eligible property
Once the statement is issued, the IRS will consider it valid for the life of the tax incentive. You need not attach a
copy of the statement to your tax return to claim the deduction. In addition, the IRS does not require you to fill out
a separate special form to claim the deduction. You need simply write "Section 19$ Election" on your income tax
return nsxt to the line where the remediation expense is claimed as a deduction.
Taxpayers should be aware that states are not precluded from using information provided by a taxpayer to take
action ax a property under state cleanup or enforcement authorities.
Please note that the designated stale agencies do not determine whether a given expenditure is eligible. Taxpayers
should work with their tax counsel on the matter of eligible expenses.
Other Resources
These guidelines were prepared in partnership with Department of Treasury, Department of Commerce's Economic
Development Administration, Department of Housing and Urban Development, and the Small Business Administration.
Taxpayers should also consider the following resources for information on the Brownfields Tax Incentive.
Internal Revenue Service publications. Further information is available in IRS publication 954, "Tax Incentives for
Empowerment Zones and Other Distressed Communities" at h ttp://www.irs.ustreas.gov/fonm pubs/pubs/p954tochtm
or the "Environmental Cleanup Cost Deduction" at http:tfw\vw.irs.iistreas.eov/fonns pubs/Dubs/p954B5.htm. To
confirm whether property or expenses are eligible for deduction under the tax incentive, taxpayers should consult with tax
counsel or environmental attorney. In addition, the identified state contacts listed on the next page may provide needed
technical assistance on using the tax incentive.
U.S. Environmental Protection Agency. Additional fact sheets on the Brownfields Tax Incentive are available at
trww.epa.gov/brownfields/ or by calling (202) 260-4039.
HUD's Community Connections Service. You can receive technical assistance and printed materials on the Brownfields
Ta?t Incentive by calling (800) 998-9999.
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Table 1.2 Contact List for Slates and Territories
State/Territory
Alabama
Alaska
Arizona
Arkansas
California
Colorado
Connecticut
Delaware
Florida
Georgia
Hawaii
Idaho
Illinois
Indiana
Iowa
Kansas
Kentucky
Louisiana
Maine
Maryland
Massachusetts
Michigan
Minnesota
Mississippi
Missouri
Montana
Nebraska
Nevada
New Hampshi -e
New Jersey
New Mexico
New York
North Carolin i
North Dakota
Ohio
Oklahoma
Oregon
Pennsylvania
Puerto Rico
Rhode Island
South Carolin;
South Dakota
Tennessee
Texas
Utah
Vermont
Virginia
Washington
West Virginia
Wisconsin
Wyoming
List available on the internet at wHnv.epa.gov/brtnvnfields/stxcntct.htm
Contact
William Hardy, Alabama Dept. of Environmental Management
Alaska Department of Environmental Conservation
Amanda Can, Arizona Dept. of Environmental Quality
Jean Koeninger, Arkansas Dept. of Pollution Control and Ecology
Sandy Karinen, California Dept. of Toxic Substances Control
Dan Scheppers, Colorado Dept. of Public Health and Environment
Thomas Botti, Connecticut Dept. of Environmental Protection
Delaware Dept. of Natural Resources and Environmental Control
Mary Blakeslee, Florida Office of Tourism
Darren Meadows, Georgia Department of Natural Resources
Bryce Hataoka, Hawaii Dept. of Health
Idaho Bureau of Hazardous Materials
Shirley Baer, Illinois Environmental Protection Agency
Indiana Dept. of Environmental Management
Lavoy Haage, Iowa Dept. of Natural Resources
Kansas Dept. of Health and Environment
Herb Petitjean, Kentucky Division of Waste Management
Louisiana Dept. of Environmental Quality
Nicholas Hodgkins, Maine Dept. of Environmental Protection
Jim Metz, Maryland Department of the Environment
Nicholas Zavolas, MA Dept. of Environmental Protection
James Linton, Michigan Department of Environmental Quality
Gerald Stahnke, Minnesota Pollution Control Agency
Jerry Banks, Mississippi Dept. of Environmental Quality
Jim Belcher, Missouri Dept. of Natural Resources
Carol Fox, Montana Dept. of Environmental Quality
JefFKelley, Nebraska Dept. of Environmental Quality
Eugene Klara, Nevada Division of Environmental Protection
New Hampshire Dept. of Environmental Services
Terri Smith, New Jersey Dept. of Environmental Protection
Stacy Sabol, New Mexico Environment Department
New York State Dept. of Environmental Conservation
Jack Butler, NC Dept. of Environment and Natural Resources
Fritz Schwindt, North Dakota Dept. of Health
Amy Yersavich, Ohio Environmental Protection Agency
Rita Kottke, Oklahoma Dept. of Environmental Quality
Kevin Dana, Oregon Dept. of Environmental Quality
Thomas Fidler, Pennsylvania Dept. of Environmental Protection
Miguel Maldonado
Angela Shulman, RI Dept. of Environmental Management
Keith Lindler, SC Dept. of Health and Environmental Control
South Dakota Dept. of Environment and Natural Resources
Andy Shivas, Tennessee Dept. of Environment and Conservation
Chuck Epperson, TX Natural Resources Conservation Commission
Utah Department of Environmental Quality
George Desch, Vermont Agency of Natural Resources
Chris Sitaram, Virginia Dept. of Environmental Quality
Harold Bucholz, Washington Dept. of Ecology
Ken Ellison, West Virginia Division of Environmental Protection
Michael Prager, Wisconsin Dept. of Natural Resources
Wyoming Dept. of Environmental Quality
Phone Number
(334)271-7974
(907) 465-5010
(602)207-1109
(501)682-0854
(916)255-3745
(303) 692-3398
(860)424-3794
(302)739-4403
(850) 922-8743
(404) 657-8600
(808) 586-1248
(208) 334-3263
(217) 785-8728
(317)232-8611
(515)281-4968
(785)296-1535
(502) 564-6716
(504) 765-0261
(207)287-2651
(410)631-3437
(617)556-1125
(517) 373-8450
(612)297-1459
(601)961-5221
(573)526-8913
(406) 444-0478
(402)471-3387
(702)687^670
(603)271-6778
(609) 984-3122
(505) 827-2754
(518)457-3446
(919)733-2801
(701)328-5150
(614) 644-2285
(405) 702-5127
(503)229-6629
(717) 783-7816
(787)767-8181
(401)222-2797
(803) 896-4052
(605) 773-5559
(615)532-0912
(512) 239-2498
(801)536-4404
(802)241-3491
(804) 698-4403
(360)407-7185
(304) 558-5929
(608) 26M927
(307) 777-7758
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Demco, Inc. 38-293
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