w 'O r i 3 Brownfields Tax Incentive EPA's Brownfields Program is designed to empower states, communities, and other stakeholders in economic redevelopment to work together in a timely manner to prevent, assess, safely clean up, and sustainably reuse brownfields. A brownfield is a property, the expansion, redevelopment, or reuse of which may be complicated by the presence or potential presence of a hazardous substance, pollutant, or contaminant. EPA's Brownfields Program provides financial and technical assistance for brownfields revitalization, including grants for environmental assessment, cleanup, and job training. OVERVIEW The Brownfields Tax Incentive is intended to remove many of the financial disincentives preventing the cleanup and reuse of blighted property. The Brownfields Tax Incentive encourages brownfields redevelopment by allowing taxpayers to immediately reduce their taxable income by the cost of their eligible cleanup expenses. This incentive creates an immediate tax advantage from these expenses, helping to offset short-term cleanup costs. Originally signed into law in August 1997, the Taxpayer Relief Act (Public Law 105-34) included a tax incentive to spur the cleanup and redevelopment of brownfields in distressed urban and rural areas. The Brownfields Tax Incentive was amended in December 2000 (as part of Public Law 106-554). Now, a wider range of properties can qualify for this incentive. 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 usebe 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 over time. 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 landmany of whom wished to return the land to productive useat 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. 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. In addition, taxpayers must obtain a statement from a designated state agency verifying eligibility for the tax incentive. State contacts can be found on EPA's web site at http://www.epagov/brownfields/stxcntct.htm Sites listed, or proposed for listing, on EPA's National Priorities List are not eligible for the tax incentive. 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. While amended tax returns may be filed to deduct expenditures from prior tax years, costs incurred after August 5,1997, 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. The Brownfields was extended in October 2004 in the Working Families Tax Relief Act to cover qualifying expenditures from the original date of the incentive's enactment until midnight of December 31, 2005. CONTACT U.S. EPA-OSWER Office of Brownfields Cleanup and Redevelopment (202) 566-2777 For additional information on EPA's Brownfields Program, visit the EPA Brownfields web site at: http://www.epa.gov/brownfields/ Bzrwifielck Ehct Stest and Bnsrgsncy (5105) EPA 500-F-03-223 Jure 2003 ------- United States Office of Solid Waste & EPA 500-F-01-338 Environmental Protection Emergency Response August 2001 Agency (5105) www.epa.gov/brownfields 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. These areas are "brownfields," which EPA defines as "abandoned, idled, or under-used industrial and commercial facilities where expansion or redevelopment is complicated by real or perceived contamination." 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. On the public 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 have also seen the advantages of brownfields redevelopment. Many of these sites are located in areas with strong infrastructure, transportation, and urban markets. To encourage 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 as part of the Taxpayer Relief Act on August 5, 1997, and amended on December 21, 2000. 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 over time. The Treasury Department estimates that the $300 million incentive will leverage $3.4 billion in private investment and 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 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 Tax Incentives 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 the 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. 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 These Guidelines The next few pages of this guide will help you determine whether your property may be eligible to take advantage of the Brownfields Tax Incentive. This step-by-step guide covers: A fictional case study to show you the potential benefits of the incentive; A description of the types of taxpayers that may use the tax incentive; Guidelines on the types of eligible cleanup deductions you may take; A description of additional criteria for qualifying expenditures between August 5, 1997 and December 21, 2000; and Instructions on how to seek state verification of property and contamination eligibility. ------- 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's 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. Step 1; Determine whether you meet the taxpayer requirements. 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 . 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 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 release 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, 2006. 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. 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 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 costs of building an access road could be eligible if they were paid or incurred in connection with the abatement or control of hazardous substances, but not if they 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: Site assessment and investigation; Site monitoring; Cleanup costs; ------- Operations and maintenance costs; State voluntary cleanup program oversight fees; and 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/swerosps/bf/stxcntct.htm. You may also call EPA's Brownfields Office 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. Taxpayers should also be aware that states are not precluded from using information provided by a taxpayer to take action at a property under state cleanup or enforcement authorities. Step 4; Additional criteria for qualifying expenditures between August 5. 1997 and December 21. 2000. As mentioned in the "Background" section of these guidelines, the Brownfield Tax Incentive's geographic requirements for property eligibility have been eliminated for expenditures on or after December 21, 2000. While amended tax returns may be filed to deduct expenditures from prior tax years (provided that the costs were incurred after August 5, 1997, the effective date of the initial tax incentive law), costs incurred prior to December 21,2000 can only be deducted in the same year if the property meets any of the following geographic criteria: Census tracts with poverty rates of 20 percent or more; Census tracts with populations of less than 2,000 where more than 75 percent of the tract is zoned for commercial or industrial use, and the tracts are adjacent to one or more census tract(s) with poverty rates of 20 percent or more; Federally designated Empowerment Zones (EZ) or Enterprise Communities (EC); and EPA-designated Brownfields Pilot sites announced before February 1, 1997. If the costs were incurred between the applicable dates, the taxpayer should work with their state environmental agency and their tax counsel to ensure that the property lies within an eligible area. The taxpayer will have to obtain a statement from the state environmental agency that the property is within an eligible area (and that it is a property at or on which there has been a release, threat of release, or disposal of a hazardous substance at or on the property- see Step 3). Sites on EPA's Superfund National Priorities List (NPL) are not eligible for the Incentive. ------- 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 http://www.irs.gov/pub/irs-pdf/p954.pdf 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 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 www.epa.gov/brownflelds/ or by calling (202) 566-2777. HUD's Community Connections Service. You can receive technical assistance and printed materials on the Brownfields Tax Incentive by calling (800) 998-9999. 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. Contact List for States and Territories List available on the Internet at www. epa.sov/brawnfields/stxcntct. htm ------- BROWNFIELDS TAX INCENTIVE FREQUENTLY ASKED QUESTIONS This document provides answers to some of the most frequently asked questions (FAQs) about the federal Brownfields Tax Incentive. The questions are divided into the following sections: I. Background on the Brownfields Tax Incentive II. Meeting the Contamination Criteria III. Determining Eligible Expenses IV. Meeting the Ownership Criteria V. Meeting the Geographic Criteria VI. Securing State Eligibility Statements I. BACKGROUND ON THE BROWNFIELDS TAX INCENTIVE Ql: When was the Brownfields Tax Incentive passed and why? Al: The Brownfields Tax Incentive was passed as part of the Taxpayer Relief Act (Public Law 105-34), which was signed into law on August 5, 1997. EPA and the Department of the Treasury worked with lawmakers to create the Incentive, which was needed to spur the cleanup and redevelopment of brownfields in distressed areas. The Brownfields Tax Incentive was enacted, in part, to level the playing field between taxpayers who caused environmental contamination at certain properties and those who did not. Since 1994, the Internal Revenue Service (IRS) has ruled that certain costs incurred to assess and clean up soil and groundwater could be deducted as business expenses in the year incurred (rather than having to be capitalized over time). The IRS ruling, however, only addressed cleanup costs incurred by taxpayers who had contaminated the property. It did not address cleanup costs incurred by taxpayers who had purchased previously contaminated property. These parties had to capitalize over several years the expenses incurred to clean up the property. The new tax law provided a powerful incentive to motivate taxpayers to purchase, clean up, and redevelop brownfields in distressed areas. The Brownfields Tax Incentive originally only covered expenditures at properties that met specific land use, geographic, and contamination requirements. To expand the use of the tax incentive, the geographic requirements were eliminated when Public Law 105-34 was amended on December 21, 2000 (Public Law 106-554), leaving only land use and contamination qualifications for expenditures on or after December 21, 2000. However, expenditures prior to that date (and on or after the incentive's effective date of August 5, 1997) must have been paid or incurred at properties that also meet the geographic conditions. Q2: Why is the Brownfields Tax Incentive beneficial? A2: The Incentive permits a taxpayer to treat any "qualified environmental remediation expense" as a deductible expense in the year incurred, rather than charging the expense to a capital account. Deductible expenses reduce a taxpayer's taxable income and thus generally reduce his or her income tax liability. Without the Brownfields Tax Incentive, ------- BROWNFIELDS TAX INCENTIVE FAQs (AUGUST 2001) PAGE 2 new property owners had to capitalize, i.e., add to basis, the cost of their land remediation expenditures. These taxpayers could not recover these costs for tax purposes until they sold the land. Q3: What properties are eligible for the Brownfields Tax Incentive? A3: The Brownfields Tax Incentive was initially applicable to properties that met specific land use, geographic, and contamination requirements. The geographic requirements were removed in December 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 included in the taxpayer's inventory. To satisfy the contamination requirement, the taxpayer must demonstrate that there has been a release, threat of release, or disposal of a hazardous substance at the property. Amended tax returns may be filed to deduct expenditures from prior tax years, provided that the costs were incurred after August 5, 1997, the effective date of the initial tax incentive law. However, costs incurred prior to December 21, 2000 can be deducted in the same year only if the property also met the geographic criteria. The taxpayer should work with their state environmental agency to ensure that the property lies within an eligible area. Applying only to expenditures incurred between August 5, 1997 and December 21, 2000, the four geographic areas of eligibility include: Census tracts with poverty rates of 20 percent or more; Census tracts with populations of less than 2,000 where more than 75 percent of the tract is zoned for commercial or industrial use, and the tracts are adjacent to one or more census tract(s) with poverty rates of 20 percent or more; Federally designated Empowerment Zones (EZ) and Enterprise Communities (EC); and EPA-designated Brownfields Pilot sites announced before February 1, 1997. Sites listed, or proposed for listing, on EPA's Superfund National Priorities List (NPL) are not eligible for the Incentive. Only expenses that are paid or incurred in connection with the abatement or control of a hazardous substance qualify for the Incentive. Taxpayers should consult with their tax counsel to determine which expenses are eligible. Taxpayers must also consult with their appropriate state Brownfields Tax Incentive contact to verify a property's eligibility and obtain the required state property eligibility statement. A list of state Brownfields Tax Incentive contacts can be found at: http://www.epa.gov/brownfields/contacts.htm. Q4: Must the property meet all or only one of the listed "targeted area" (i.e., geographic) criteria? ------- BROWNFIELDS TAX INCENTIVE FAQs (AUGUST 2001) PAGE 3 A4: For expenses incurred between August 5, 1997 and December 21, 2000, the eligible property need only meet one of the four listed criteria. For expenses incurred on or after December 21, 2000, the property is not subject to the geographic requirements. Q5: Are taxpayers who cause contamination eligible for the Brownfields Tax Incentive? AS: Responsible parties who contaminate and remediate a property without changing its use have always been able to deduct environmental cleanup costs. The Brownfields Tax Incentive broadens this allowance by permitting these same property owners to also expense these costs if they are changing the use of the property. As noted in Answer 1, the Brownfields Tax Incentive seeks to "level the playing field" between polluting and non- polluting parties by providing both with the same advantages. II. MEETING THE CONTAMINATION CRITERIA Q6: Does "hazardous substance" as defined in the Brownfields Tax Incentive exclude contamination from oil and/or mixtures with oil? A6: The definition of "hazardous substance" in the tax provision is in large part based on Section 101(14) of the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA). Section 101(14)..contains a qualified exclusion for petroleum, including crude oil and its fractions. However, hazardous substances that are mixed with petroleum products may be included in the scope of CERCLA and may also be included under the Brownfields Tax Incentive. Q7: Does the Brownfields Tax Incentive distinguish between hazardous wastes and hazardous substances? A7: The definition of "hazardous substance" in CERCLA Section 101(14) includes certain "hazardous wastes." For example, the CERCLA definition of hazardous substances includes wastes that EPA lists..under RCRA or hazardous wastes that are ignitable, corrosive, reactive, or toxic. Q8: Can EPA clarify "a release or threat of a release"? A8: CERCLA 101(22) defines the term "release" to include, "any spilling, leaking, pumping, pouring, emitting, emptying, discharging, injecting, escaping, leaching, dumping, or disposing into the environment." Much case law exists on what constitutes a release or threat of a release that should help the states in making this determination. Taxpayers should consult with tax counsel and their appropriate state agency contact to clarify whether the circumstances at their property qualify as a release or threat of release under the Tax Incentive. A list of state contacts be found at: http://www.epa.gov/brownfields/contacts.htm. Q9: What documentation must taxpayers provide to their state to show that there has been a release or a threat of release? ------- BROWNFIELDS TAX INCENTIVE FAQs (AUGUST 2001) PAGE 4 A9: Taxpayers and/or their tax counsel should contact their designated state agency to determine what documentation the state will require in order to provide the state property eligibility statement. A list of state contacts be found at: http://www.epa.gov/swerosps^f/stxcntct.htm III. DETERMINING ELIGIBLE EXPENSES Q10: What is the difference between incurring and paying for an expenditure? If the taxpayer incurs an allowable expenditure in one tax year, but pays for it in another tax year, does the taxpayer get to elect in which tax year to take the deduction? A10: Generally, the year in which the taxpayer may take a deduction will depend on the taxpayer's accounting method. Taxpayers should consult with tax counsel to determine when specific expenditures must be taken into account for tax purposes. Qll: Referring to Section 198(b)(l)(A) of the Brownfields Tax Incentive, what does it mean to be "otherwise chargeable to capital account?" What are allowable expenses? All: The Brownfields Tax Incentive was created to permit a taxpayer to obtain a current deduction for certain environmental remediation costs, rather than delay the deduction to a future year. Certain environmental remediation costs must be capitalized, i.e., included in the cost of the taxpayer's property and recovered as the property is used, sold, or otherwise disposed of. Other environmental remediation costs may be expensed during the year in which they were paid for or incurred. The Brownfields Tax Incentive only seeks to impact the former category. If an expense is already deductible within the year it was incurred, there is no need to invoke the provisions of this Incentive. The category of allowable expenses under the Brownfields Tax Incentive is broad. Taxpayers should consult with tax counsel to determine whether specific cost items are allowable expenses. Q12: Can the expenditures from the removal of asbestos or lead from a building be deducted under the Brownfields Tax Incentive? A12: Section 198(d) of the Brownfields Tax Incentive excludes expenditures associated with substances for which a removal or remedial action would not be permitted under CERCLA §104(a)(3). CERCLA §104(a)(3) generally provides that a removal or remedial action cannot be taken to address products that are part of the building structure and result in exposure within residential buildings or business or community structures (e.g., interior lead-based paint contamination or asbestos which results in indoor exposure). Taxpayers should consult with tax counsel and their appropriate state agency contact to determine the circumstances in which a taxpayer's activities may qualify for deduction. A list of state contacts be found at: http://www.epa.gov/swerosps^f/stxcntct.htm. ------- BROWNFIELDS TAX INCENTIVE FAQs (AUGUST 2001) PAGE 5 Q13: Do costs for site assessment and investigation activities qualify as remediation expenditures under the Brownfields Tax Incentive? A13: Yes. Site assessment and investigation activities are qualified environmental remediation expenditures if incurred "in connection with the abatement or control of hazardous substances at a qualified contaminated site." Site assessment efforts must, therefore, be part of a larger abatement or control effort to qualify under the Tax Incentive. Q14: Can expenditures for assessment or monitoring inside a building qualify for the Brownfields Tax Incentive? A14: These expenditures may qualify for the Brownfields Tax Incentive if the costs can be characterized as environmental remediation costs and were used in connection with the abatement or control of a release or a threat of release of a hazardous substance. However, see Question 12 regarding limitations on expenditures associated with indoor contamination. Q15: Do the costs related to construction of access roads and operations and maintenance (O&M) qualify as remediation expenditures? A15: Yes, if the access road or O&M activity is paid or incurred in connection with the abatement or control of a release, threat of release, or disposal of a hazardous substance at the property. Q16: Do state voluntary cleanup program (VCP) oversight fees qualify as remediation expenditures? A16: Yes, if these costs are used in connection with the abatement or control of a release, threat of release, or disposal of a hazardous substance at the property. Q17: Can taxpayers deduct and/or depreciate the remediation expenditures under the Brownfields Tax Incentive if they are going to reuse the property for a park or open space? A17: No, the taxpayer must hold the property for use in trade or business or for the production of income to qualify for the Brownfields Tax Incentive. Q18: How would the Brownfields Tax Incentive apply in a situation where a taxpayer capped soil contamination with a parking lot? A18: The service costs related to the soil remediation and cap construction would be deductible. The portion of the parking lot truly functioning as the cap (underneath the asphalt) may qualify as a deductible expense under the Incentive. ------- BROWNFIELDS TAX INCENTIVE FAQs (AUGUST 2001) PAGE 6 Q19: Assume a responsible party settled with a state, and the state uses these settlement funds to conduct remediation activities over the next few years. Can the taxpayer claim these expenditures under the Brownfields Tax Incentive? A19: Qualified settlement funds were not addressed in the legislation. It is unlikely that the taxpayer would be able to claim these expenses since the funds have already been turned over to the state. Q20: Does the IRS plan to issue regulations listing those costs that qualify as eligible expenses under the Brownfields Tax Incentive and those that do not? A20: No. At this point, the IRS does not plan to issue regulations about the Brownfields Tax Incentive. Q21: What is the effective date of the tax law that triggers when a taxpayer's assessment and cleanup expenditures can be eligible for deduction under the Tax Incentive? A21: The Brownfields Tax Incentive became law on August 5, 1997. Any expenditures paid for or incurred on or after that date and prior to the law's expiration on January 1, 2006 , and that meet all other criteria, are eligible for the Tax Incentive. Please note that the geographic requirements are applicable only for expenses incurred between August 5, 1997 and December 21, 2000. IV. MEETING THE OWNERSHIP CRITERIA Q22: With regard to the definition of "qualified contaminated site" in Section 198(c)(l)(A) of the Brownfields Tax Incentive, what types of uses constitute "a trade or business or for the production of income, or which is property described in section 1221(1) in the hands of the taxpayer?" A22: Each of these terms is a term of art in the tax world. Generally, any property used for non-personal purposes will be considered qualified under this portion of the law. Section 1221(1) properties are generally inventory properties or properties held by the taxpayer for sale in the course of his or her trade or business. Q23: Does an environmental assessment paid for by a prospective purchaser of a qualified contaminated site qualify as an environmental remediation cost? A23: Generally, these costs are not eligible for the Tax Incentive since the law requires that the property must be "held by the taxpayer." Taxpayers should consult with tax counsel to determine circumstances in which property is considered "held by the taxpayer" for purposes of determining whether it is a "qualified contaminated site." ------- BROWNFIELDS TAX INCENTIVE FAQs (AUGUST 2001) PAGE 7 Q24: Can investment properties and properties held by a developer for future sale qualify for the Tax Incentive? A24: Yes. Properties held by the taxpayer for use in trade or business or for the production of income, including investment properties and properties held by a developer for future sale, can qualify for the Brownfields Tax Incentive. Q25: Are properties owned by a municipality, and leased to a taxpayer, eligible for the Brownfields Tax Incentive? A25: The answer depends upon whether the property is considered "held by the taxpayer." There are conceivable circumstances where a municipally owned property might be considered a qualified contaminated property and where environmental remediation costs might qualify for the Incentive. A taxpayer who pays for remediation at a property for which he or she has a long-term lease (e.g., 99 years) on municipally owned property might qualify for the Incentive. Taxpayers should consult with tax counsel to determine circumstances in which a taxpayer's property may qualify for the Incentive. Q26: Are there any circumstances where leased or rented properties would meet the criteria "held by the taxpayer?" For example, if a historic land trust specifically prevents ownership and the tenant operates on repeating 3-year leases, would the tenancy qualify as being held by the taxpayer-tenant? A26: Again, the answer depends upon whether the property is considered "held by the taxpayer." There are conceivable circumstances where a leased property might qualify for the Incentive. A taxpayer who pays for remediation at a property for which he or she has a long-term lease (e.g., 99 years) might qualify for the Incentive. Short-term leases, including 3-year leases, would probably not qualify unless there was a continuing commitment to renew the lease year after year. Taxpayers should consult with tax counsel to determine circumstances in which the taxpayer's property may qualify. V. MEETING THE GEOGRAPHIC CRITERIA (REQUIRED ONLY FOR EXPENSES INCURRED BETWEEN AUGUST 5. 1997 AND DECEMBER 21. 2000) Q27: What criteria must a property meet to qualify as being located in a "targeted area"? (Applicable only for expenses incurred between August 5, 1997 and December 21, 2000.) A27: Section 198(c)(2)(A) of the Brownfields Tax Incentive states generally that properties must be located in one of the following four targeted areas to be eligible: Census tracts with poverty rates of 20 percent or more; Census tracts with populations of less than 2,000 where more than 75 percent of the tract is zoned for commercial or industrial use, and the tracts are next to other census tract(s) with poverty rates of 20 percent or more; Federally designated EZs and ECs; and ------- BROWNFIELDS TAX INCENTIVE FAQs (AUGUST 2001) PAGE 8 EPA-designated Brownfields Pilot sites announced before February 1, 1997. Sites listed, or proposed for listing, on EPA's Superfund NPL are not eligible for the Incentive. Q28: What criteria are used to determine whether the population in a census tract is "below the poverty level"? (Applicable only for expenses incurred between August 5, 1997 and December 21, 2000.) A28: Poverty level determinations are based on data compiled and published by the Bureau of Census. Determination of poverty depends upon income and family size (generally, families of four or more with yearly incomes below $20,000 a year are determined to be below the poverty level). Adjustments for regional or area variations in income and cost of living are not included in the nationally determined computations. This poverty information is publicly accessible via the Internet at several different locations: The Federal Financial Institutions Examination Council provides an easy-to-use tool for looking up census tract numbers for a street address or zip code at http://www.ffiec.gov/geocode/default.htm. The Census Bureau provides state-by-state lists of census tracts with poverty rates of 20 percent or more at http://www.census.gov/ftp/pub/housing/tracts/. The Census Bureau also provides an electronic tool to look up census tracts, poverty rates, and other 1990 census data free of charge. For more information, visit http://www.census.gov/apsd/www/censtats.html. The Census Bureau provides a consolidated list for resources that includes links to many of the sources listed here at http://www.census.gov/geo/www/tractez.html. Links to these and other Tax Incentive-related web sites will be added to the EPA Brownfields web site (http://www.epa.gov/brownfields/) in the near future. Q29: If a locality does not have zoning, can "land use" be substituted for "land zoned" to meet the eligibility criteria? (Applicable only for expenses incurred between August 5, 1997 and December 21, 2000.) A29: Yes. Generally, "land use" is the same as "land zoned," unless a non-conforming use is being retained. If the local jurisdiction does not use the term "zoning," the state agency will likely use the local equivalent to make an eligibility determination. However, because zoning occurs at the local level, most states do not have zoning designations on a statewide basis. Q30: Does eligibility apply beyond federally designated EZs and ECs? (Applicable only for expenses incurred between August 5, 1997 and December 21, 2000.) A30: Only properties, or portions of properties, that lie within federally designated EZs and ECs are eligible. Properties designated as EZs or ECs by state or local governments are not considered targeted under the Tax Incentive law. ------- BROWNFIELDS TAX INCENTIVE FAQs (AUGUST 2001) PAGE 9 The Department of Housing and Urban Development (HUD) provides an easy-to-use Internet tool to check whether a street address is within the boundaries of an EZ or an EC (http://www.hud.gov/ezec/locator/). For a more general listing of EZ/ECs, visit http://www.ezec.gov/Communit/index.html. In addition, links to these and other Tax Incentive-related web sites are available on the EPA Brownfields web site (http ://www.epa.gov/brownfields/). Q31: Are all properties within the federally designated EZs and ECs eligible? (Applicable only for expenses incurred between August 5, 1997 and December 21, 2000.) A31: Yes. Any property within the boundaries of a federally designated EZ or EC meets the EZ/EC criteria. Q32: What if only a portion of the site meets the EZ/EC requirement of the geographic criteria? Can appropriate costs be expensed for the entire property? (Applicable only for expenses incurred between August 5, 1997 and December 21, 2000.) A32: The EZ/EC eligibility requirement applies to remediation costs attributable to the portion of a property that lays within a federally designated EZ or EC. If a property is only partially located within such a designated area, only remediation expenditures related to the portion of the property within that area will qualify for the Brownfields Tax Incentive. Q33: Which of the EPA Brownfields Pilots were announced before February 1, 1997? (Applicable only for expenses incurred between August 5, 1997 and December 21, 2000.) A33: Before February 1, 1997, EPA had announced 75 Brownfields Pilots. The list of these 75 Pilots is accessible on the EPA Brownfields web site at http://www.epa.gov/brownfields/html-doc/list_st.htm. In addition, contact information for these Pilots is accessible on the web site at http://www.epa.gov/brownfields/contacts.htm. Q34: Are all properties within a Brownfields Pilot's political boundaries eligible for the Incentive? Must the properties be inventoried and/or targeted by the Pilot? (Applicable only for expenses incurred between August 5, 1997 and December 21, 2000.) A34: Only those properties within a Brownfields Pilot's political boundaries that are actively involved in Pilot activities meet the Brownfields Pilot criteria. The property does not have to be using Pilot funds to be eligible, but must be acknowledged by the Pilot project manager as part of the Pilot. Most Brownfields Pilots have targeted specific areas or communities, and eligible properties must be in these areas. The designated Pilot project manager will provide a certification to the taxpayer and/or designated state agency if a property meets this eligibility criterion. Further, only those portions of the property that fall within the designated Pilot area boundaries are eligible for the Incentive. Again, the list of these 75 Pilots is accessible on the EPA Brownfields web site at http://www.epa.gov^ownfields/html-doc/list_st.htm. ------- BROWNFIELDS TAX INCENTIVE FAQs (AUGUST 2001) PAGE 10 Q35: Is the entire state eligible for the Brownfields Tax Incentive in statewide Brownfields Pilots? (Applicable only for expenses incurred between August 5, 1997 and December 21, 2000.) A35: No. Only those properties officially recognized by the Pilot project manager as part of the Pilot are eligible for the Brownfields Pilot certification. For example, Minnesota initially identified approximately 50 properties in its Pilot application. Only these 50 properties would meet the Brownfields Pilot criterion. Q36: If an eligible Brownfields Pilot has expanded since its cooperative agreement was signed, is the expanded area eligible? (Applicable only for expenses incurred between August 5, 1997 and December 21, 2000.) A36: No. Only properties/areas targeted by the Pilot at the time of its cooperative agreement negotiations are eligible. Q37: Will those Pilots whose cooperative agreements are closed or coming to a close still be eligible for the Incentive? (Applicable only for expenses incurred between August 5, 1997 and December 21, 2000.) A37: Yes. The only requirement is that they were designated as a Brownfields Pilot before February 1997. Q38: Does the Tax Incentive apply to a Resource Conservation and Recovery Act (RCRA) facility meeting all geographic and other property requirements? (Applicable only for expenses incurred between August 5,1997 and December 21, 2000.) A38: Yes. Q39: Are assessment and cleanup expenses incurred at NPL sites eligible for the Incentive? (Applicable only for expenses incurred between August 5,1997 and December 21, 2000.) A39: Sites listed, or proposed for listing, on EPA's NPL are not eligible for the Incentive. ------- BROWNFIELDS TAX INCENTIVE FAQs (AUGUST 2001) PAGE 11 VI. SECURING STATE PROPERTY ELIGIBILITY STATEMENTS Q40: What are the states doing under the new tax law? A40: States address two basic requirements under the Tax Incentive. First, the law required that each state designate, within sixty (60) days after the law's enactment (August 5, 1997), a lead agency as the "appropriate state environmental agency" to handle inquiries and requests for property certifications from its taxpayers. The law authorized EPA to make this designation if states did not make it within 60 days. Second, the law required that states provide each of their taxpayers, upon request, a written statement that a specific property meets the following two elements of the "qualified contaminated site" requirement: (a) the property is within a defined targeted area (applicable only for expenses incurred betweenAugust 5, 1997 and December 21, 2000.); and (b) there has been a release, threat of release, or disposal of any hazardous substance at or on the property. It is expected that taxpayers will rely upon tax counsel, not their designated state agency, for clarification of other issues related to the Brownfields Tax Incentive. If contact information at the designated state agency changes, the state should notify EPA of the information change. States can send updated contact information to Ellyn Krevitz Fine at EPA Headquarters, or contact her at (202) 566-2775 or krevitz.ellyn@epa.gov. She will make sure the information is kept current on the EPA Brownfields web site. A listing of state contacts can be found here: http://www.epa.gov/brownfields/stxtnctc.htm. Q41: How can a taxpayer verify that a property is eligible for the Brownfields Tax Incentive? A41: Taxpayers need to receive a statement from their designated state agency (usually the department responsible for environmental protection) that there has been a release, threat of release, or disposal of any hazardous substance at or on the property (note: for expenditures between August 5, 1997 and December 21, 2000, the statement must also indicate that the property qualifies under the geographic criteria discussed in Section V). Taxpayers and/or their tax counsel should contact their designated state agency to learn what documentation the state requires the taxpayer to submit in order to obtain this statement. Once the statement is issued, the IRS will consider it valid for the life of the Tax Incentive. To claim the deduction, you need simply write "Section 198 Election" on your income tax return next to the line where you claim the deduction. Any written verification received from the state should be maintained in the taxpayers records. Taxpayers can find contact information for their designated state agencies by accessing the EPA Brownfields web site at http://www.epa. gov/brownfields/stxtnctc.htm. The taxpayer is responsible for certifying that he or she holds the property for business purposes and that he or she incurred qualified environmental remediation expenses. Q42: Do the states require proof of a property's geographic eligibility? (Applicable only for expenses incurred between August 5,1997 and December 21, 2000.) ------- BROWNFIELDS TAX INCENTIVE FAQs (AUGUST 2001) PAGE 12 A42: Taxpayers and/or their tax counsel should contact their designated state agency to determine what documentation the state requires be submitted in order to obtain the property eligibility statement. Taxpayers can find contact information for their designated state agencies by accessing the EPA Brownfields web site at http://www.epa.gov/swerosps^f/stxcntct.htm. Q43: How do states verify a property's eligibility? A43: Methods of verifying a property's eligibility vary from state to state. Wisconsin, for example, will require that the applicant attach a letter from the appropriate municipality indicating that the area meets the industrial zoning criteria. Even if zoning information was available in a geographic information system (GIS) at the state level, it would be practically impossible to monitor because zoning is conducted at the local level and is constantly changing. Q44: How are states designing their property eligibility statement processes? A44: Several states have developed their programs to provide property eligibility statements for taxpayers. The Michigan Department of Environmental Quality (DEQ) serves as one example. Michigan attempted to develop the quickest, most cost-effective way to collect the essential information required to make a property eligibility decision. Michigan relies on taxpayers to verify that their properties are in a target area (applicable only for expenses incurred between August 5, 1997 and December 21, 2000) and that there has been a release or threat of a release, or disposal, of a hazardous substance at or on the property. Michigan has developed a checklist that walks taxpayers through eligibility requirements and provides guidance on the type of information they must submit to prove that a property meets the established criteria. In addition, Michigan developed an affidavit template for taxpayers to complete and submit to the DEQ. Once the taxpayer has submitted the affidavit and supporting documents, Michigan conducts a quick desktop review of the materials and either declares the property eligible or tells the taxpayer what sort of additional information is needed. Q45: How long are state property eligibility statements valid? Will the states have to issue statements for sites incurring ongoing O&M costs each year? A45: Property eligibility statements are valid for the applicable life of the Incentive (currently scheduled to sunset on January 1, 2003). The IRS, not the states, has the authority to determine whether the ongoing O&M costs are eligible remediation expenditures. Q46: Can a state declare a property eligible before any work has been done on abatement and control? A46: Yes. States are responsible for providing a statement that the geographic criteria (applicable only for expenses incurred between August 5, 1997 and December 21, 2000) have been met and that there has been a release or threat of a release, or disposal, of a hazardous substance at or on the property. States are not responsible for determining whether or not any abatement or control activities have taken or will take place. ------- BROWNFIELDS TAX INCENTIVE FAQs (AUGUST 2001) PAGE 13 Q47: What if a request for a state property eligibility statement identifies a contaminated property of which the state was not previously aware? Do properties identified pursuant to the Tax Incentive go on a federal cleanup "list?" A47: If a state learns about a property through its property eligibility process, it may determine that the property warrants state involvement. EPA does not believe this will create a disincentive to requesting a state property eligibility statement. This does, however, raise the point that the taxpayers may want to gather some preliminary information on their property before talking to the state about it. Taxpayers can use tools available over the Internet, such as census data , to do this. There is no federally maintained list of properties identified under the Brownfields Tax Incentive. States, however, may maintain such a list and may choose to refer sites of potential federal interest to EPA. Q48: Can a state that requires taxpayers by law to inform the state of a release or threat of a release use the Brownfields Tax Incentive state property eligibility statement requests as a form of such notification and require the owner to undergo cleanup? A48: A state may determine, based on information provided in order to obtain a state property eligibility statement, that a release or threat of release warrants state involvement, including a state enforcement action. EPA recommends that states that plan on using submitted information in this manner inform taxpayers of this possibility on the property eligibility statement application. Q49: How are the Tribal reservations being handled with regard to the Brownfields Tax Incentive? A49: The statute does not specifically address this issue. The Department of the Treasury indicated that this will be handled on a case-by-case basis. ------- BROWNFIELDS TAX INCENTIVE FAQs (AUGUST 2001) PAGE 14 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" athttp://www.irs.gov/pub/irs-pdf/p954.pdf 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 identified state contacts listed below may provide needed technical assistance on using the tax incentive. U.S. Environmental Protection Agency. For more information, please contact headquarters at (202) 566-2777 or your Regional Brownfields Coordinator at: http://www.epa.gov/swerosps/bf/corcntct.htm HUD's Community Connections Service. You can receive technical assistance and printed materials on the Brownfields Tax Incentive by calling (800) 998-9999. 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. Contact List for States and Territories List available on the Internet at www.epa.sov/brownfields/stxcntct.htm ------- Federal Brownfields Tax Incentive: Alliance Environmental West Chester, Pennsylvania Overview The Federal Brownfields Tax Incentive encourages brownfields redevelopment by allowing taxpayers to reduce their taxable income by the cost of their eligible cleanup expenses. The Incentive was originally signed into law in August 1997 as part of the Taxpayer Relief Act. It was renewed in October 2004 through the Working Families Tax Relief Act of 2004 and continues until December 2005. To qualify for the Tax Incentive, three criteria must be met: The property must be held by the taxpayer incurring the cleanup cost for use in a trade or business; Hazardous substances must be present or potentially present on the property; and The taxpayer must obtain a statement from a designated state agency verifying eligibility for the Tax Incentive. Designed to spur investment in blighted properties and assist in revitalizing communities, the Federal Brownfields Tax Incentive can serve as a critical tool in brownfields cleanup and redevelopment efforts. Project Highlights The Federal Brownfields Tax Incentive was instrumental in enabling Alliance Environmental to clean up and redevelop an 8.5-acre former landfill and pharmaceutical property in an economically distressed neighborhood of West Chester, Pennsylvania. Now the location of the Good Will Business Park, which encompasses over 100,000 square feet of retail space, the property supports many tenants including a local volunteer fire department, the West Chester Area Senior Center, and a district court building. The Federal Brownfields Tax Incentive provided Alliance Environmental with nearly $800,000 in tax relief. ------- Project Background Alliance Environmental is a demolition and environmental service company located in West Chester, Pennsylvania. In 1997, faced with the need for larger office and storage facilities, the company 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 brick quarry, a landfill, and a pharmaceutical manufacturing facility, Wyeth Incorporated. Wyeth had produced penicillin in the 1970s and '80s and groundwater on the property remained contaminated from this and other activities. Before any construction could begin, Alliance knew that it would have to address the environmental cleanup issues associated with the property. Benefits of the Tax Incentive Once Alliance identified the contaminated property and saw its potential, the cleanup and redevelopment process began with Alliance purchasing the property in 1998. Through a newsletter published by a local environmental consulting firm, Alliance learned about the Tax Incentive. In analyzing its financial options, the company realized the Tax Incentive's value. For a small business like Alliance, the Tax Incentive was critical to maintaining adequate cash flow during cleanup and redevelopment. Alliance was able to expense its cleanup costs at the end of the year and receive an injection of cash as a tax refund. Once the site was cleaned up, the existing building was renovated, and other buildings were constructed from the ground up. The site is now home to the Good Will Business Park. Income from leasing of the Business Park has enabled Alliance to expand its revenue base. The company has also expanded its scope of work from primarily asbestos abatement and demolition work to include property cleanup and redevelopment. A combination of the Federal Brownfields Tax Incentive and a local, municipal tax incentive program provided Alliance with nearly $800,000 in tax relief. Process for Utilizing the Tax Incentive While Alliance's accountant was initially hesitant about using the then-new Federal Tax Incentive, the company found the Incentive's application and approval process to be straightforward. Senya Isayeff, a principal of Alliance Environmental, also found the process to be customer-oriented and streamlined. Isayeff obtained an eligibility statement from the Pennsylvania Department of Environmental Protection's (DEP) web site and completed the application in one day. Within a week, DEP had provided Alliance with a letter that approved the site as qualified for the Tax Incentive. According to Mr. Isayeff, throughout the process, DEP staff were committed to making the process work, and handled all inquiries with efficiency and professionalism. Alliance also made use of local tax incentives for the Good Will Business Park project. In ------- particular, Alliance used a municipal tax extension in Chester county called LERTA, which offers a three-year abatement for increased value in property taxes. As a result, Alliance only had to pay taxes on the previously determined value of the property. Alliance was also able to use state programs to assist with brownfields restoration, which dovetailed well with the Tax Incentive. The first was the Pennsylvania Act 2 Program, which provides indemnity to the developer from liability issues; the second was the Pennsylvania Act 3 Program, which provides indemnity from liability issues to lenders. Community Impact of the Brownfields Tax Incentive Both the community of West Chester, as well as the neighborhood around the Good Will Business Park, have benefitted from Alliance's cleanup and redevelopment of the 8.5-acre former brownfield. As mentioned, four new tenants have located on the Good Will Park, bringing new commerce and services to the area. One of the new tenants, the local volunteer fire department, now has a more central location for responding to emergency calls. In addition, properties adjacent to and nearby the Good Will Business Park have increased in value, which their owners attribute to the Alliance project. Within a two block area of the Good Will property, Habitat for Humanity is constructing 17 new homes and a 12,000 SF retail strip mall was completed and occupied. The local bank had initially expressed concern about loaning money to Alliance due to possible environmental liability issues. The use of Pennsylvania Acts 2 and 3, along with the Federal Brownfields Tax Incentive, eased its worries about liability. According to Mr. Isayeff, the bank's president eventually saw the advantages of using the Federal Brownfields Tax Incentive to clean up this property. A precedent was set within the local lending community that financing brownfields can be easier than originally perceived. Alliance has since obtained financing for other cleanup and redevelopment projects in the area. In October 2003, Alliance purchased a 13.5-acre former concrete plant. Again, the Federal Brownfields Tax Incentive was utilized to aid in the cleanup process. The new headquarters of the Good Will Fire Department. ------- Continuing Success Alliance is a proponent of the Tax Incentive and has an interest in its continued availability. Currently, the company is proposing the cleanup and redevelopment of a 114-acre property that was once the location of the state mental hospital. Once cleanup is completed, Alliance would convey the property to the municipal government and have it preserved as protected greenspace for the community to enjoy. In addition, Chester county has asked Alliance to contact other municipalities in the area to make them aware of brownfields cleanup and redevelopment tools, including the Federal Brownfields Tax Incentive. Without the Tax Incentive, the brownfields cleanup and redevelopment projects in West Chester, PA may not have proceeded. As Senya Isayeff says, "By developing brownfields, we help preserve open space somewhere else, while also strengthening neighborhoods like this one." For more information about the Federal Brownfields Tax Incentive, please visit http://www.epa.gov/brownfields/bftaxinc.htm. For more information on requirements for using the Federal Brownfields Tax Incentive in Pennsylvania, please visit http://www.dep.state.pa.us/dep/deputate/airwaste/wm/landrecy/Tax/tax.htm. Federal Brownfields Tax Incentive Solid Waste EPA 560-F-05-228 Case Study and Emergency August 2005 Alliance Environmental Response (5105T) www.epa.gov/brownfields ------- Federal Brownfields Tax Incentive: Fields Environmental Bloomington, Indiana Overview The Federal Brownfields Tax Incentive encourages brownfields redevelopment by allowing taxpayers to reduce their taxable income by the cost of their eligible cleanup expenses. The Incentive was originally signed into law in August 1997 as part of the Taxpayer Relief Act. It was renewed in October 2004 through the Working Families Tax Relief Act of 2004 and continues until December 2005. To qualify for the Tax Incentive, three criteria must be met: The property must be held by the taxpayer incurring the cleanup cost for use in a trade or business; Hazardous substances must be present or potentially present on the property; and The taxpayer must obtain a statement from a designated state agency verifying eligibility for the Tax Incentive. Designed to spur investment in blighted properties and assist in revitalizing communities, the Federal Brownfields Tax Incentive can serve as a critical tool in brownfields cleanup and redevelopment efforts. Project Highlights The Federal Brownfields Tax Incentive enabled Fields Environmental to expense approximately $80,000 in cleanup costs during the redevelopment of a 4-acre abandoned recycling center property near Bloomington, IN. The restored property, now home to the T.R. Thickstun Glass Company, includes economic and greenspace redevelopment. Upon completion of the Glass Company project, Fields Environmental initiated work on two other brownfields cleanup and redevelopment projects in and around Bloomington. The Federal Brownfields Tax Incentive has been a cornerstone for both projects. ------- Project Background As a small environmental cleanup business in Bloomington, IN, Fields Environmental is constantly looking for new opportunities. In 1997, the company became aware of the Federal Brownfields Tax Incentive through email correspondence with other environmental consultants. Knowing that Bloomington had several brownfields, Fields saw the chance to put the Tax Incentive to use. The company identified an abandoned site contaminated with foundry waste from its former use as a recycling center. In a purchase that became the first public/private partnership to use low-interest financing under a recently enacted state Brownfields financing program, Fields Environmental purchased the site in a tax sale from Monroe County. The company then hired an environmental consulting firm to complete assessments, which revealed the presence of some hazardous substances. In preparation for redevelopment, Fields began a cleanup of the site that involved the removal of 60 loads of contaminated soil and the import of more than 80 loads of new soil and clay. The property is currently home to a commercial glass company. Benefits of the Tax Incentive Fields Environmental's awareness of the Federal Brownfields Tax Incentive greatly assisted its cleanup and redevelopment operations. Indeed, the Incentive is an invaluable tool that allows businesses to perform cleanup and redevelopment projects, as some key expenditures can be written off as tax breaks. Rudy Fields, the owner of Fields Environmental, stated that the Tax Incentive "allows a little 'bump' to keep cash coming until the redevelopment occurs. I have told so many people about the Tax Incentive and how it is really important for smaller companies." According to Mr. Fields, approximately $80,000 in cleanup costs were able to be expensed through the Federal Brownfields Tax Incentive. Once cleanup on the Fields property was complete, the property was leased by the T.R. Thickstun Glass Company, which created three new jobs. Since then, the Tax Incentive made it economically feasible for Fields Environmental to initiate cleanup and redevelopment on two other brownfields in the Bloomington area. Process for Utilizing the Tax Incentive Mr. Fields notes that it was a relatively uncomplicated process to have the Indiana Department of Environmental Management (IDEM) certify that the property qualified for the Tax Incentive. To certify the property, IDEM required a fully executed affidavit, including Phase I and II reports. Fields Environmental sent a letter and supporting documentation to IDEM, demonstrating that the property was a qualified site. After IDEM issued the certification, Fields was able to expense the cleanup costs associated with the project through the Tax Incentive. According to Mr. Fields, the Brownfields staff at IDEM was also helpful, responding efficiently to all inquiries from Fields Environmental. Utilizing the Federal Tax Incentive proved so easy for Fields, he went on to use it in additional cleanup and redevelopment projects. ------- Recently completed headquarters of the T.R. Thickstun Glass Company. Community Impact of the Brownfields Tax Incentive Along with the success of the former recycling center project, Fields Environmental's other brownfields projects continue to offer benefits to the community. On the first of these other projects, Fields purchased a former plating facility from a federal bankruptcy court sale. Fields then worked with IDEM to complete Phase I and II assessments, installed four monitoring wells on the property, and successfully used the Federal Tax Incentive for expensing cleanup costs. The project was also assisted through a Community Development Block Grant from the U.S. Department of Housing and Urban Development. While still in progress, Mr. Fields believes this redevelopment project will produce new jobs when a manufacturing or production firm chooses to locate on this soon to be cleaned up property. The second project involved a former junkyard contaminated with lead and PCBs. Fields Environmental purchased the site and is now conducting Phase I and II environmental assessments. Once cleanup is complete, these costs will be expensed using the Federal Tax Incentive. As the property is located in a lower-income area of Bloomington, the city has taken a particular interest in the project. Following cleanup, the city plans to purchase the property from Fields and turn it into three residential lots. Fields has also expressed interest in moving his company's headquarters to an existing building on the property. These projects have encouraged additional redevelopment in Bloomington's distressed areas and continue to improve the outlook for local residents. ------- Continuing Success Fields Environmental plans to continue to use the Federal Brownfields Tax Incentive for business opportunities that may not be possible otherwise. The Tax Incentive helps small business owners like Fields keep cash flowing during cleanup activities. IDEM now makes other stakeholders aware of potential brownfields property sales that they might be able to cleanup and redevelop, further promoting the reuse of brownfields throughout the State of Indiana. Fields Environmental continues to spread the word about the Federal Brownfields Tax Incentive to business owners who stand to benefit from it. For more information about the Federal Brownfields Tax Incentive, please visit http://www.epa.gov/brownfields/bftaxinc.htm. For more information on requirements for using the Federal Brownfields Tax Incentive in Indiana, please visit http://www.in.gov/idem/land/brownfields/index.html. Federal Brownfields Tax Incentive Solid Waste EPA 560-F-05-226 Case Study and Emergency May 2005 Fields Environmental Response (5105T) www.epa.gov/brownfields ------- New Markets' "ax Credits Brownfields Solutions Series I A brownfield is a property on which expansion, redevelopment, or reuse may be complicated by the presence, or perceived presence, of contamination. EPA's Brownfields Program provides grants to fund environmental assessment, cleanup, and job training activities. Additionally, EPA seeks to strengthen the marketplace and encourages stakeholders to leverage the resources needed to clean up and redevelop brownfields. This Brownfields Solutions factsheet is intended for brownfields stakeholders interested in how the U.S. Department of the Treasury's New Markets Tax Credit (NMTC) Program can be used as a financing mechanism in brownfields cleanup and redevelopment. The NMTC Program is a development tool designed to stimulate the economies of low-income communities. The Program's tax credits, and the investment spurred by them, help to make brownfields projects in low-income communities financially viable. What is the New Markets Tax Credit Program? Successful brownfields cleanup and redevelopment projects turn idle land into thriving centers for busi- ness, housing, or industry. While brownfields are often located in lower-income communities, a site's location is not usually a deterrent in itself. Financing often presents the most significant obstacle; institu- tions are sometimes reluctant to lend money to a project with poten- tial environmental liability issues. However, the Community Renewal Tax Relief Act of 2000 provides a financing option that can benefit brownfields cleanup and redevelop- ment projects. This legislation established the New Markets Tax Credit (NMTC) Pro- gram to promote economic devel- opment in rural and urban low-in- come communities. The Program is a federal tax initiative designed to increase the amount of investment capital available to business and economic development programs in low-income communities, many of which are affected by brownfields. The NMTC is administered by the Community Development Financial Institutions (CDFI) Fund under the U.S. Department of the Treasury. The CDFI Fund was cre- ated for the sole purpose of expand- ing the availability of credit, invest- ment capital, and financial services in distressed urban and rural com- munities. Each year, tax credits are allocated for distribution to certain qualifying entities through the CDFI Fund. These qualifying community groups are known as Community Development Entities, or CDEs. Tne $15 billion, NMTC Program provides private-sector investors (e.g., banks, insurance companies, corporations, and individuals) with federal income tax credits in return for new investments in eligible busi- nesses, ranging from small business startups to real estate development. Brownfields cleanup and redevelop- ment projects often fall under these NMTC qualifications. ------- The New Markets Tax Credit Process This flowchart illustrates how the NMTC Program functions in four stages. First, an entity applies to the CDFI Fund, for certification as a CDE. Entities can apply at any time of the year. Once an organization is certified as a CDE, the designation will last for the life of the organiza- tion as long as the CDE continues to comply with the NMTC Pro- gram requirements. Once certified, the CDE engages in a competitive application process for the tax credit allocation. The CDFI Fund evaluates NMTC al- location applications in four areas: business strategy, capitalization strategy, management capacity, and community impact. Certain criteria also help the CDFI Fund determine if an entity is well suited to receive an allocation of credits. For example, the applying entity must indicate the percentage of qualified, low-income community investments that will be used to finance activities in certain geo- graphic areas, including brown- fields. The higher the percentage of applicable community investments indicated on the application, the better the applicant will score under the Community Impact section of the NMTC Allocation Application. The NMTC allocation applications are due in the Fall with recipients being announced the following Spring. If the application is suc- cessful, the Fund awards a tax credit allocation to the CDE. Third, the CDE secures investors through the sale of stock or issuance of an equity interest in exchange for those tax credits. Finally, the CDE uses the resulting investor equity to make investments in low-income communities. What is a Qualifying CDE? In order to qualify as a CDE, the entity must be a corporation or partnership that has a mission of serving, or providing investment capital, for low-income communities or persons. The group must also maintain accountability to residents of low-income communities through resident representation on governing or advisory boards. CDEs can include organizations such as community development corporations (CDCs), community development financial institutions, community development venture capital funds, small business development corporations, community loan funds, specialized small business investment companies, and others. These organizations are often the catalysts behind successful brownfields How do CDEs use their investments? After a CDE has received an allocation of tax credits, it can begin to receive money from investors. A CDE can use this capital to make loans to or investments in qualified businesses, invest in or loan to other CDEs, purchase qualified loans from other CDEs, or provide financial counseling to businesses or community residents. While all of a CDE's loans must be targeted to the low-income area identified by the CDE, there is significant flexibility in the types of businesses and development activities that NMTC investments can support. Gives Credits to CDFI Fund Give credits to (against Federal Income tax)\ Investors Community Development Entity (CDE) stock or capital interest in redevelopment projects. Both nonprofit and for-profit groups may apply to be certified by the CDFI Fund. These groups are evaluated on the same criteria. However, since nonprofit corporations cannot sell stock or issue equity, a for-profit affiliate will have to be set up in order to receive the tax credits. Low-Income Communities Invests in or Lends rto Qualified Active Lower Income Community Businesses (QALICBs) Which May Include Brownfields Redevelopment Projects Provides Financial Counseling & Related Services Purchases Loans from CDEs Which May Include Community Development Loans for Brownfields Redevelopment Projects ^Invests in or Lends to CDEs Which May Finance Brownfields Redevelopment Projects A low-income community generally is a census tract with a poverty rate of at least 20% or with median family income of up to 80% of the area median family income. -2- ------- How Can Brownfields Stakeholders Take Advantage of the New Markets Tax Credit Program? The NMTC provides a unique financing source for brownfields cleanup and redevelopment. Brownfields stakeholders have three primary options to take advantage of the NMTC Program. The first option for stakeholders is to apply to existing CDEs to fund their projects. Of the 2004 second round CDE allocatees, several have identified brownfields redevelop- ment as specific goals for their eco- nomic development efforts. Brown- fields stakeholders are encouraged to access the CDFI Web site for the location of CDEs in their region. The Web site also provides profiles of community revitalization proj- ects the CDE is targeting and can guide stakeholders towards pos- sible brownfields project financing (http-.llwww. cdfifund.gov). The second option is for stakehold- ers to apply for CDE certification themselves, apply for an allocation of tax credits, and offer the tax credits to potential investors. As a certified CDE, a brownfields stake- holder or group can best identify which cleanup and redevelopment projects will most help the local community. Although this process may be more complex than the first option, it is viable for entities com- mitted to large scale or long-term brownfields efforts. The third option for stakeholders is to apply and become certified as a CDE, then apply to receive equity financing from other CDEs, which have an allocation of New Markets CDEs Investing in Brownfields Projects Several CDEs are exploring investments in brownfields projects, such as: Great Lakes Region Sustainability Funds LLC: This CDE will make loans and take equity positions in businesses and real estate projects in low-income communities in Illinois, Indiana, and Wisconsin. These investments will focus on remediating and redeveloping area brownfields. The NMTC will allow Great Lakes to offer new products including tenant loans, financing for brownfields projects, financing for lead abatement, and technical assistance to low-income municipalities and nonprofits. Shorebank Enterprise Pacific: In order to assist low-income communities in the Pacific Northwest, this CDE will subordinate debt and equity to environmentally sensitive commercial properties, industrial properties, brownfields, and community development real estate projects. MassDevelopment New Markets LLC: Four real estate development projects that are not only on brownfields, but of critical importance to four of the most deeply distressed communities in the state, will be financed by this CDE. Milwaukee Economic Development Corporation: A goal to provide "gap" financing for businesses located in distressed areas of the city, including abandoned brownfields properties. For more information on these or other CDEs, please visit http://www.cdfifund.gov. Tax Credits. One of the purposes of a CDE, as defined earlier, can be to invest in projects of other CDEs. Investment by one CDE in another CDE is viable when the proceeds are used for a qualified low-income community investments. This can include funding to businesses owned in whole or part by a CDE or equity investment in, or loan to, a CDE. What are the advantages of the New Markets Tax Credit Pro- gram to brownfields stakehold- ers? There are several advantages as- sociated with using the NMTC Program for brownfields project funding. For example, a CDE can structure a more favorable deal than traditional lending institutions for brownfields properties. Traditional lending institutions may be more reluctant to lend to brownfields projects compared to projects that are perceived as less risky due to fewer environmental complications. In addition, CDEs may offer loans for pre-development on projects that are unlikely to secure tradi- tional funding. Loans can be used for pre-development activities such as land acquisition, environmental remediation, demolition, site prepa- ration, construction, renovation, and infrastructure improvements. Brownfields stakeholders may also apply for funding to assist with cleanup, and additional funding for redevelopment and construction ac- tivities. In certain situations CDEs can also provide technical assistance for brownfields cleanup. Loans from CDEs for brownfields projects can be structured to pro- vide more flexibility and lower interest rates. According to Donna Ducharme of the Great Lakes Region Sustainability Fund, "CDEs are typically willing to lend at cost to nonprofits and government enti- ties." This is a direct advantage for local or municipal government or- ganizations managing a brownfields project. Ms. Ducharme also notes that CDE loans for brownfields -3- ------- Three Ways Brownfields Stakholders Can Access the NMTC Program for Project Financing Stakeholders may apply to an existing CDE to fund their projects Stakeholders may apply for CDE certification and apply for an allocation of New Markets Tax Credits Stakeholders may apply for CDE projects are typically structured to allow a two-year period for cleanup. CDEs involved with brownfields cleanup and redevelopment projects have reported "packaging" various funding sources together. Low- income community development projects may be eligible for a wide range of federal and local financ- ing credits and incentives, ranging from Tax-Increment Financing to Community Development Block Grants. Funding can also be used in conjunction with EPA Brown- fields Grants to complete pre-devel- opment activities such as cleanup (http:llwww. epa.gov/brownfields). Great Lakes and MassDevelopment New Markets LLC cite examples of loans including those for retail centers, mixed-use commercial and residential properties, cleanup of a ground water plume on a property to be used as a recreational-vehicle park, and cleanup of a property to be developed into a professional office park. A brownfields stakeholder that is pursuing multiple brownfields cleanup and redevelopment ef- forts or projects of significant scale can benefit from the New Markets Tax Credits. Whether applying to become certified as a CDE and ap- plying for a tax credit allocation, or applying to receive project funding from an existing CDE, the NMTC Program offers unique financing op- portunities for brownfields cleanup and redevelopment. How do Investors Receive Tax Credits from a CDE? The credit provided to the investor totals 39% of the investment in a CDE and is claimed over a seven year credit allowance period. For example, the Fund awards a tax credit allocation of $1 million to a CDE, which offers the tax credit to investors. Ten investors each invest $100,000 in return for the tax credit. Each investor can claim 5%, or $5000 annually from their federal income tax in years one to three of the tax credit. In years four through seven, the investors can claim 6%, or $6000 per year. The total tax credit value to the investor over seven years is $39,000, or 39%. YR1:$5000 YR 2: $5000 YR 3: $5000 YR 4: $6000 YR 5: $6000 YR 6: $6000 YR 7: $6000 Total: $39,000 Source: http://www.cdfifund.gov/docs/ nmtc/2005/OutreachPresentation.ppt For More Information EPA Brownfields Cleanup and Redevelopment - Funding and Financing for Brownfields: http://www.epa.gov/brownfields/mmatters.htm The Funding and Financing for Brownfields Web site provides links to additional resources, such as factsheets, guides, and other Web sites, that provide information on financing issues encountered in brownfields cleanup and redevelopment. Community Development Financial Institutions (CDFI) Fund: httD://www.cdfifund.aov The CDFI Fund Web site provides access to CDE and NMTC application materials and workshops, a map of qualified census tracts and counties, and other information about the NMTC Program. Brownfields Solutions Series New Markets Tax Credits Solid Waste and Emergency Response (5105T) EPA-560-F-05-223 June 2005 www. epa. gov/brownfields/ -4- ------- |