Brownfields Tax Incentive
Guidelines
Background
The U.S. Environmental Protection Agency (EPA)
is committed to helping clean up and revitalize
former industrial or commercial areas that were
abandoned due to concerns about environmental
contamination. EPA and its federal partners believe
that with the right incentives, these former engines
of industrial growth can once again generate value
for both the private and public sectors.
What's in these Guidelines:
D An introduction to the Brownfields
Tax Incentive
D A real life case study
D Recommended steps for utilizing the
Brownfields Tax Incentive
A list of additional resources
D
These areas are "brownfields," which EPA defines
as "real property, the expansion, redevelopment, or reuse of which may be complicated by the presence or
potential presence of a hazardous substance, pollutant, or contaminant." These properties may be large or small;
urban or rural; former factories or warehouses. They have all been left idle due to concerns about cleanup costs
and legal liabilities.
Originally signed into law as part of the Tax Relief Act of August 1997, and codified through Section 198(a) of
the Internal Revenue Code, the Brownfields Tax Incentive is intended to spur the cleanup and revitalization of
brownfield properties. 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 have also seen the advantages of
brownfields redevelopment. Many of these sites are located in areas with existing infrastructure, transportation,
and promising markets.
Under the tax incentive, certain environmental cleanup costs at targeted sites may be fully deducted by eligible
taxpayers in the year in which they are incurred, rather than having to be capitalized and spread over a period of
years. This tax incentive is one of many federal initiatives to encourage business development and commercial
economic revitalization. There are programs in existence that address a multitude of brownfields issues, including
expanding access to capital, small business technical assistance, and workforce training and hiring incentives.
Business owners should review the full range of initiatives available to help turn a brownfield into an attractive
business location.
An Introduction to the Brownfields Tax Incentive
The Brownfields 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 eligible cleanup costs as a current expense, rather than
capitalizing them as long-term assets. Companies prefer deductions because these substantially reduce their
current income, allowing them to capture tax savings now rather than later.
The Brownfields Tax Incentive encourages brownfields cleanup and redevelopment by allowing taxpayers to
immediately reduce their taxable income by the cost of their eligible cleanup expenses. The incentive creates an
immediate tax advantage from these expenses, helping to offset short-term cleanup costs.
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The Brownfields Tax Incentive: A Real Life Example
The following real life example demonstrates the benefits of the Brownfields Tax Incentive in practice.
(Note: additional case studies involving the Brownfields Tax Incentive can be found at:
http://www.epa.gov/brownfields/bftaxinc.htm.)
Project Background
Located in West Chester, Pennsylvania, Alliance Environmental is a demolition and environmental service
company that was looking to expand its headquarters. The company identified a nearby, 8.5-acre property with a
building that Alliance hoped to renovate. The site's former uses included a landfill and a pharmaceutical
manufacturing facility that had produced penicillin during the 1970s and 1980s, contaminating the site's
groundwater. Alliance purchased the property in 1998. Through a newsletter published by a local environmental
consulting firm, Alliance became aware of the then relatively new Brownfields Tax Incentive, and immediately
recognized it as a way to maintain adequate cash flow during cleanup and redevelopment. The tax incentive
allowed Alliance to deduct cleanup expenses in the same year they were incurred, and receive a cash injection in
the form of a tax refund.
Benefit #1 - An Upfront Cash Infusion
The approval process for Alliance's use of the Brownfields Tax Incentive was straightforward. The company
obtained an eligibility statement from the Pennsylvania Department of Environmental Protection's (PA DEP) web
site, and completed and submitted the tax incentive application in one day. Within a week, the PA DEP provided
Alliance with a letter verifying that the site qualified for the tax incentive.
Use of the incentive benefited Alliance in the following ways:
D Expensing cleanup costs in the year incurred reduced the net income on which Alliance's taxes were paid.
D Because a smaller portion of Alliance's profit from that year went to pay taxes, Alliance used the resulting
savings to defray redevelopment costs.
D Alliance's tax savings, combined with savings from a municipal tax incentive available in Pennsylvania's
Chester County, totaled more than $800,000.
D The value of Alliance's project was increased by the first year savings—and earnings on those 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).
Benefit #2: A Lower Real Tax Burden
Because the actual value of taxes paid are affected by when payments are made, Alliance also benefited in the
following ways:
D By realizing tax savings in the first year, Alliance's savings were impacted over the usable life of the
improved property by inflation.
D Because of inflation, dollars saved in the present year are worth more than would be dollars saved in future
years, if costs are amortized rather than expensed.
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Outcome
The new headquarters of the Good Witt Fire Department.
Having saved more than $800,000 through the
Brownfields Tax Incentive and another, local tax
incentive, Alliance developed the property into Good
Will Park, bringing new commerce and services to the
area with more than 100,000 square feet of retail space.
One of the park's tenants, the local volunteer fire
department, now has a more central location for
responding to emergency calls. Adjacent properties have
also increased in value, which their owners attributed to
the Good Will Park redevelopment. Alliance has since
used the Brownfields Tax Incentive to enable additional
projects, including the cleanup and redevelopment of a
13.5-acre, former concrete plant.
Recommended Steps for Utilizing the Tax Incentive
Step 1: Determine whether you meet the taxpayer requirements.
D The property must be "held by the taxpayer." This definition includes outright ownership. However, some
types of long-term lease arrangements may qualify. If there is a question, taxpayers should consult with their
tax counsel to determine whether their circumstances qualify. A list of state Brownfields Tax Incentive
contacts can be found at: http://www.epa.gov/swerosps/bf/stxcntct.htm.
D The taxpayer must hold the property for business or income generation purposes. This may include trade or
business property, investment property, or property held as inventory. This does not include personal use
property.
Step 2: Find out whether your property meets eligibility requirements.
In general, a property is eligible for the tax incentive if it is an area at or on which there has been:
D A release or threat of release of a hazardous substance (including petroleum products).
D Disposal of a hazardous substance (including petroleum products).
However, the property must not be listed or proposed for listing on EPA's Superfund National Priorities List.
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What constitutes a release or a
threat of release?
A release under the Comprehensive Environmental
Response, Compensation, and Liability Act
(CERCLA) includes spilling, leaking, pumping,
pouring, emitting, emptying, discharging, injecting,
escaping, leaching, dumping, or disposing 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 release to exist, it must involve or threaten
the outdoor environment.
What is a hazardous substance?
The Brownfields Tax Incentive defines "hazardous
substance" as any substance that is defined under
CERCLA. The list of CERCLA hazardous
substances can be found at 40 CFR §302.4, Table
302.4. However, the Brownfields Tax Incentive
excludes products that are part of the structure of a
building and result in exposure within that building
(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.
To determine whether a particular substance is a
"hazardous substance," you should consult an
environmental attorney. U.S. EPA Regional offices
may also be a source of information on defining a
hazardous substance.
In December 2006, changes to provisions of the
Brownfields Tax Incentive were made to allow the
deduction of expenses for the cleanup of petroleum
products (e.g., crude oil, crude oil condensates, and
natural gasoline), which had previously been
ineligible. This new eligibility for petroleum
products applies to cleanup expenses incurred from
January 1, 2006 to the incentive's current expiration
on December 31,2009.
What expenses are eligible?
Generally, taxpayers may deduct those expenses that
are paid or incurred in connection with the
abatement or control of hazardous substances. For
example, the cost of building an access road could
be eligible if it was paid or incurred in connection
with the abatement or control of hazardous
substances, but not if it would just speed
construction of a new building. If a taxpayer
acquires otherwise depreciable property in
connection with such an activity, the property's cost
will not be immediately deductible, but may be
expensed over the life of the property. Absent the
Brownfields Tax Incentive, such depreciation would
not be allowed.
Types of eligible expenses include:
n Site assessment and investigation;
D Site monitoring;
n Cleanup costs;
n Operation and maintenance costs;
n State voluntary cleanup program oversight fees;
and
n Removal of demolition debris.
Step 3: 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 there
has been a release, threat of release, or disposal of a hazardous substance at or on the property. You can find your
state's designated agency by visiting EPA's Web site at http://www.epa.gov/brownfields/stxcntct.htm. You may
also call EPA's Office of Brownfields and Land Revitalization at (202) 566-2777'.
Each state agency will have a different application process and documentation requirements. Please note that the
designated state agencies do not determine whether a given expenditure is eligible. Taxpayers should work with
their tax counsel on the matter of eligible expenses.
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Additional 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.
D Internal Revenue Service Publications. To confirm whether property or expenses are eligible for deduction
under the tax incentive, taxpayers should consult with tax counsel. It may also be useful to consult with an
environmental attorney. In addition, the state contacts available at
http://www.epa.gov/brownfields/stxcntct.htm may provide needed technical assistance on using the tax
incentive.
D U.S. Environmental Protection Agency. For more information, please contact EPA's Office of Brownfields
and Land Revitalization at (202) 566-2777 or your Regional Brownfields Coordinator.
D U.S. EPA's Enviromapper. This Web-based database enables a user to map various types of environmental
information, including air releases, drinking water, toxic releases, hazardous wastes, water discharge permits,
and Superfund sites. Enviromapper can be accessed at http://www.epa.gov/enviro/html/em/index.html.
D A Frequently Asked Questions (FAQ) document regarding the Brownfields Tax Incentive, as well as a
general fact sheet, can be found at: http://www.epa.gov/brownfields/bftaxinc .htm.
D Additional case studies on the Brownfields Tax Incentive can also be found at:
http: //www .epa. gov/brownfields/bftaxinc .htm.
United States Environmental
Protection Agency
Washington, B.C. 20460
Brownfields Tax
Incentive Guidelines
EPA-560-F-08-312
November 2008
www.epa.gov/brownfields/
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