Is the deduction for environmental cleanup costs being swept away?

Article Abstract:

The IRS has contradicted a previous letter ruling by not allowing an expense deduction for the cost of environmental cleanup in TAM 9541005. The party involved acquired the property in a clean state and later donated it to the county. The county returned the land due to its contamination. The owner cleaned it up, claiming that because it was clean when it first bought the property, the costs were deductible as a maintenance expense. The IRS incorrectly ruled in the TAM that the chain of title for the, from owner to county to owner, resulted in the company receiving the land in a dirty state and that the cost of cleaning needed to be capitalized.

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Tax consequences of environmental clean-up costs: an updated history

Article Abstract:

The IRS has not come to a clear and final conclusion on the taxation of environmental clean-up costs. The IRS suggests that if such costs are considered maintenance or repair they are currently deductible, and if they are considered capital improvements they must be capitalized. In making the distinction between the two in environmental cases, the courts have relied on either a future benefits test to prove capitalization or a before-and-after test to show current deductibility as a repair. Further conflicting signals have been sent by the IRS in the form of revenue rulings and other guidance.

Interpretation and construction, Liability for environmental damages, Environmental law

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Current developments: (1) accounting for construction management contracts, (2) when the production period begins under section 263A

Article Abstract:

The distinction between construction services and actual construction is important for tax reasons, and is based upon the date the production period begins, in terms of deciding if something is expensible of amortizable. For interest capitalization, physical activity on the land starts production for tax purposes, while non-interest capitalization begins when something is done to the land, physically or non-physically, in preparing it for future construction.

Construction industry, Contracts, Housing development, Amortization

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