Federal Brownfields Tax Incentive
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The Federal Brownfields Tax Incentive encourages brownfields cleanup and redevelopment by allowing taxpayers to reduce their taxable income by the cost of their eligible cleanup expenses. Designed to spur investment in blighted properties and assist in revitalizing communities, the Federal Brownfields Tax Incentive serves as a critical tool in brownfields cleanup and redevelopment efforts.
By using the Federal Brownfields Tax Incentive, environmental cleanup costs are fully deductible in the year that they are incurred, rather than the costs being capitalized. There are three requirements to qualify:
- The property must be held by the taxpayer incurring the eligible cleanup expenses for use in a trade or business or for the production of income.
- Hazardous substances must be present or potentially present on the property.
- Taxpayers must obtain a statement from a designated state agency verifying eligibility for the Tax Incentive, such as through a voluntary cleanup program.
San Francisco Giants SBC Park, San Francisco, California
In December 1995, the San Francisco Giants baseball team announced plans to build the first privately-financed Major League ballpark in more than 30 years. The China Basin Ballpark Co., LLC, identified a 13-acre former industrial property located at China Basin near downtown San Francisco. The selected property was part of the larger Rincon Point-South Beach redevelopment project, a 115-acre redevelopment project along San Francisco’s northeastern waterfront.
The China Basin Ballpark Co. leased the land from the Port of San Francisco. Prior to redevelopment, most of the area around the property was characterized by dilapidated warehouses, open cargo storage yards, abandoned buildings, crumbling piers and unimproved streets. Former uses of the property included a waterfront landfill as well as industrial warehouses. The landfill contained waste from a coal gasification plant and other former waterfront industries.
It is estimated that use of the Federal Brownfields Tax Incentive allowed several million dollars in cleanup expenses to be returned to the developer, according to the Northeast-Midwest Institute. Total construction costs exceeded $300 million. Some Giants team officials were concerned that the high, privately funded construction costs would hurt the franchise financially. However, the team has seen annual revenue increase every year since the 41,000-seat park was completed and opened in April 2000.
Since the opening of SBC Park, the surrounding area has blossomed with restaurants, offices and housing. Light rail and open space improvements now link the area with other areas of San Francisco, and the ballpark draws crowds from throughout the Bay Area and beyond.
Properties listed or proposed for listing on EPA’s National Priorities List (NPL) are not eligible for the Tax Incentive.
The cleanup costs that are eligible to be expensed are extensive. Activities such as construction of access roads, operations and maintenance and state Voluntary Cleanup Program (VCP) oversight fees are eligible expenditures as long as they are used in connection with the abatement or control of a release, or threat of a release or disposal of a hazardous substance at a property. Site assessment and investigation activities also qualify, if incurred in connection with the abatement or control of hazardous substances at a qualified contaminated site. Stakeholders interested in using the Tax Incentive on their properties should consult their state’s list of qualified expenditures.
The steps to receiving the Tax Incentive are straightforward:
- Taxpayer begins cleanup and redevelopment project planning and considers using the Federal Brownfields Tax Incentive.
- Taxpayer determines that a hazardous substance is present or potentially present on the property in question.
- Taxpayer submits appropriate documents to the designated state agency showing the hazardous substance is present or potentially present. Interested parties contact their designated state agency to determine what documentation is required.
- Designated state agency verifies information and releases a statement to the taxpayer verifying eligibility for the Tax Incentive.
- Once the statement is issued, the Internal Revenue Service (IRS) considers it valid for the life of the Tax Incentive. To claim the deduction, taxpayers write “Section 198 Election” on their income tax return next to the line where the deduction is claimed.
Both large- and small-scale cleanup and redevelopment projects benefit from the use of the Federal Brownfields Tax Incentive. Among stakeholders that have used the Tax Incentive there is consensus that it is beneficial in expensing cleanup costs and entails a fairly simple application and certification process. Stakeholders considering brownfields cleanup and redevelopment projects should consider using the Tax Incentive because of its simplicity and effectiveness.
It is most beneficial to stakeholders to use the Tax Incentive in the early planning stages of the cleanup/redevelopment process in order to create consistency in tax and accounting procedures throughout the life of the project.
The use of the Tax Incentive can provide many advantages such as:
- The Tax Incentive allows taxpayers to deduct cleanup costs and therefore gain a tax advantage sooner. Previously, buyers of a contaminated property had to purchase the property at its impaired value and then capitalize any cleanup costs over several years.
- The use of the Tax Incentive gives brownfields stakeholders an added boost in income for the year. This is beneficial for small business owners because cash flow is not disrupted or protracted over years.
- Small businesses in the environmental cleanup and consulting sector use the Tax Incentive to complete successful brownfields cleanup and redevelopment projects. These projects lead to the businesses actively seeking out new brownfields redevelopment opportunities. After realizing the benefits of the Tax Incentive, stakeholders can expand their business operations to include brownfields cleanup and redevelopment activities.
- The Tax Incentive can be used to leverage the money devoted to construction. For example, in a situation where a taxpayer capped soil contamination with a parking lot, the service costs related to the soil remediation and cap construction were deductible.
US EPA Brownfields Tax Incentive Web Site
Visit the U.S. EPA Brownfields Tax Incentive Web site at: http://www.epa.gov/brownfields/tax/index.htm
The EPA Web site contains background information and program description, frequently asked questions, state contacts for the Tax Incentive, case studies and historical information.
Further information is available in IRS Publication 954: Tax Incentives for Empowerment Zones and Other Distressed Communities