Brownfields Tax Incentive
OVERVIEW
The Brownfields Tax Incentive, intended to remove many of
the financial disincentives preventing the cleanup and reuse
of blighted property, was amended in December 2000 (as
part of Public Law 106-554).
Originally signed into law in August 1997, the Taxpayer Relief
Act (Public Law 105-34) included atax incentive to spur the
cleanup and redevelopment of brownfields in distressed urban
and rural areas. The Brownfields Tax Incentive builds on
the momentum of the May 1997 Brownfields National
Partnership Action Agenda, which outlines a comprehensive
approach to the assessment, cleanup, and sustainable reuse
of brownfields, and includes specific commitments from more
than 20 federal agencies. The Brownfields Tax Incentive is
helping to bring thousands of abandoned and under-used
industrial sites back into productive use, providing a foundation
for neighborhood revitalization, job creation, and the restoration
of hope in our nation's cities and distressed rural areas.
BACKGROUND
Federal tax law generally requires that those expenditures
that increase the value or extend the useful life of a property—
or those that adapt the property to a different use—be
capitalized; and, if the property is depreciable, that the costs
be depreciated over the life of the property. This means that
the full cost cannot be deducted from income in the year that
the expenditure occurs. This capitalization treatment also
applies to the cost of acquiring property. In contrast, repair
and maintenance expenditures generally can be deducted from
income in the year incurred. Prior to the Brownfields Tax
Incentive, many environmental remediation expenditures fell
under these restrictions, and had to be capitalized overtime.
In 1994, the Internal Revenue Service (IRS) issued a ruling
stating that certain costs incurred to clean up land and
groundwater could be deducted as business expenses in that
same year. However, the ruling only addressed cleanup costs
incurred by the same taxpayer that contaminated the land. It
therefore did not apply to cleanup costs incurred by a party
that had purchased contaminated property, or to an owner
interested in putting the land to new use. In addition, the IRS
ruling was unclear as to whether other remediation costs not
specifically addressed in the ruling would be deductible in the
year incurred or would have to be capitalized.
These unresolved issues created potential financial obstacles
in the contaminated properties market. Specifically, owners
of contaminated property could remediate their property and
sell the clean property at its full market value, enabling them
to fully recover the costs of remediation. However,
prospective purchasers of contaminated property had to
purchase the property at its impaired value, and then capitalize
any cleanup costs. This often left prospective purchasers of
contaminated land—many of whom wished to return the land
to productive use—at a financial disadvantage. Additionally,
property owners who wanted to remediate their property and
put it to a different use were at a disadvantage because they
were not able to fully deduct their remediation costs in the
year incurred.
THE TAX INCENTIVE
Under the Brownfields Tax Incentive, environmental cleanup
costs are fully deductible in the year they are incurred, rather
than having to be capitalized. The government estimates that
while the tax incentive costs approximately $300 million in
annual tax revenue, the tax incentive is expected to leverage
$3.4 billion in private investment and return 8,000 brownfields
to productive use. This ability to spur investment in blighted
properties and revitalize communities makes the tax incentive
a valuable tool for restoring brownfields.
The Brownfields Tax Incentive was initially applicable to
properties that met specific land use, geographic, and
contamination requirements. The geographic requirements
were removed on December 21, 2000, leaving only land use
and contamination qualifications for expenditures on or after
December 21, 2000.
To satisfy the land use requirement, the property must be
held by the taxpayer incurring the eligible expenses for use in
a trade or business or for the production of income; or, the
property must be properly included in the taxpayer's inventory.
To satisfy the contamination requirement, hazardous
substances must be present or potentially present on the
property.
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While amended tax returns may be filed to deduct expenditures
from prior tax years, costs incurred after Augusts, 1997,the
effective date of the initial tax incentive law, and prior to
December 21,2000, can only be deducted in the same year if
the property qualifies under the tax incentive's original
geographic criteria.
To meet the geographic requirement, the property must be
located in one of the following areas:
• EPA Brownfields Assessment Pilot areas designated prior
to February 1997;
• Census tracts where 20 percent or more of the population
is below the poverty level;
Census tracts that have a population of less than 2,000,
have 75 percent or more of their land zoned for industrial
or commercial use, and are adjacent to one or more
census tracts with a poverty rate of 20 percent or more;
and
Any federally designated Empowerment Zone or
Enterprise Community.
Both rural and urban sites may qualify for this tax incentive.
Sites listed, or proposed for listing, on EPA's National Priorities
List are not eligible for the tax incentive.
As part of the December 2000 amendments, the Brownfields
Tax Incentive was extended for an additional two years, to
cover qualifying expenditures from the original date of the
incentive's enactment until midnight of December 31, 2003.
CONTACT
U.S. EPA-OSWER
Outreach and Special Projects Staff
(202)260-4039
Alternatively, please use the Internet World Wide Web to
access the EPA Brownfields Home Page at:
http://www. epa.gov/brownfields.
Brownfields Fact Sheet Solid Waste EPA500-F-01-339
Tax Incentive and Emergency August 2001
Response (5105) www.epa.gov/brownfields/
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