Federal Brownfields Tax Incentive

Initially enacted in 1997 and extended through December 31, 2007, the federal Brownfields Tax Incentive provides the following advantages to taxpaying stakeholders conducting environmental cleanup at contaminated sites:

• Allows environmental cleanup costs at eligible properties to be fully deductible in the year incurred, rather than capitalized and spread over a period of years.
• Improvements in 2006 expanded the types of properties eligible for the incentive to include those with petroleum contamination.
• Previously filed tax returns can be amended to include deductions for past cleanup expenditures.

The Brownfield Tax Incentive is not a tax credit, but reduces your tax burden indirectly by lowering your taxable income. The incentive does this by allowing you to claim eligible cleanup costs as a current expense, rather than capitalizing them as long-term assets. Companies prefer deductions because these substantially reduce their current income, allowing them to capture tax savings now rather than later.

The Brownfield 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 for these expenses, helping to offset short-term cleanup costs. It is applicable to properties that meet specific land use and contamination requirements. To satisfy the land use requirement, the property must either 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 meet the contamination requirement, hazardous substances as defined by CERCLA or petroleum must be present or potentially present on the property. Sites listed or proposed for listing on EPA's National Priorities List are not eligible for the tax incentive. Taxpayers must obtain a statement from KDHE's Brownfields Program verifying a property's eligibility for the tax incentive.

In addition to extending the Brownfields Tax Incentive, amendments in December 2006 expanded the scope of the law to allow the deduction of expenses for the cleanup of petroleum products (e.g., crude oil, crude oil condensates, and natural gasoline) that previously were ineligible. This new eligibility for petroleum products applies to cleanup expenses incurred from January 1, 2006 to the tax incentive's current expiration date of December 31, 2007.

Deductible expenditures include site assessment, investigation,remedial activities, remediation system O & M (operation and maintenance) costs, long-term monitoring, Voluntary Cleanup and Property Redevelopment Program (VCPRP) fees, and costs for removal of demolition debris.

Amended tax returns may be filed to deduct expenditures from prior tax years. The taxpayer must own the property while the deductible expenditures occurred, and the expenditures must by incurred or paid by December 31, 2007. IRS guidance indicates that amended returns must be filed within three years after the date a corporation filed its original return, or within two years after the date a corporation paid the tax (if filing for a refund), whichever is later. The IRS or a qualified tax professional should be consulted if there is any uncertainty as to whether prior tax year deductions are allowable.

Brownfield Tax Incentive materials are available on the Environmental Protection Agency's (EPA's) Brownfields Tax Incentive Fact Sheet. The Internal Revenue Service form for using the incentive is Schedule M-3. If you have a site that you think qualifies for the Brownfield Tax Incentive, please fill out the Qualified Contaminated Site Determination Request Form.

Please download the KDHE Federal Brownfield Tax Incentive Submittal Form (.pdf).

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