Environmental Cleanup Expense: The Tax Implications for a Business

Environmental Cleanup ExpenseIs your company facing the need to “remediate” or clean up environmental contamination? If so, the money you spend for you environmental cleanup expense can be deductible on your tax return as ordinary and necessary for business. Of course, you want to claim the maximum immediate income tax benefits possible for the expenses you incur.

These expenses may include:

  • The actual cleanup costs.
  • Expenses for environmental studies.
  • Surveys and investigations.
  • Fees for consulting.
  • Fees for environmental engineering.
  • Legal and professional fees.
  • Environmental “audit.”
  • Monitoring costs.

Current Deductions vs. Capitalized Costs

Unfortunately, every type of environmental cleanup expense cannot be currently deducted. Some cleanup costs must be capitalized. But, generally, cleanup costs are currently deductible to the extent they cover:

  • “Incidental repairs.” (For example, encapsulating exposed asbestos insulation).
  • Cleaning up contamination that your business caused on your own property. (For example, removing soil contaminated by dumping wastes from your own manufacturing processes, and replacing it with clean soil).  If you acquired that property in an uncontaminated state.

On the other hand, capitalization of environmental cleanup expenses is applicable 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.
  • Makes up for depreciation, amortization or depletion that’s been claimed for tax purposes.
  • Creates a separate capital asset that’s useful beyond the current tax year.

However, parts of these types of remediation costs may qualify for a current deduction. It depends on the facts and circumstances of your situation. For example, in one case, the IRS requires a taxpayer to capitalize the costs of surveying for contamination various sites proving the contamination. However, they allow a current deduction for the costs of surveying the sites for proof of the un-contamination.

Environmental Cleanup Expense: Maximize the Tax Breaks

In addition to federal tax deductions, there may be state or local tax incentives involved in cleaning up contaminated property. The tax treatment for corporate expenses can be complex. If you have environmental cleanup expenses, we can help plan your efforts to maximize the deductions available.