Environmental remediation costs can be deductible trade or business expense in the year they were incurred or must be capitalized and depreciated over their useful life.
All relevant facts must be analyzed to ascertain whether an expense associated with environmental remediation can be deducted or must be capitalized and depreciated.
Environmental Remediation Costs
Environmental remediation costs are all reasonable costs associated with the remediation of a contaminated site. These are not only expenses incurred to remove pollution or contaminants from environmental media such as soil, groundwater, sediment, or surface water, but also include all the costs associated with preliminary assessments, site investigations, remedial investigations, and feasibility studies.
Qualified contaminated site
Qualified contaminated site is any area which is held by the taxpayer for use in a trade or business or for the production of income where there has been a release or disposal of any hazardous substance
The area is treated as a Qualified contaminated area only if the taxpayer receives a statement from the appropriate agency of the State in which such area is located that such area meets has been contaminated.
Expensing vs Capitalizing
Generally, cleanup costs are deductible in the year incurred, to the extent they cover:
- “Incidental repairs” (for example, encapsulating exposed asbestos insulation); or
- Cleaning up contamination that the business caused on their own property if the property was acquired in an uncontaminated state.
On the other hand, some remediation costs must be capitalized and depreciated if the remediation:
- Adds significantly to the value of the cleaned-up property
- Prolongs the useful life of the property
- Adapts the property to a new or different use
There are many factors that determine whether environmental remediation cost should be expensed or capitalized. Having a clear understanding of facts and circumstances will help in making the distinction.
If you have any questions on the deductibility of environmental remediation costs or other tax issues, please reach out to SobelCo.
