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Taxmap/pubs/p535-037.htm#TXMP4685170f Environmental Cleanup Costs

Environmental Cleanup Cost

Environmental cleanup (remediation) costs are generally capital expenditures. However, you can choose to deduct these costs as a current business expense if certain requirements (discussed later) are met. This special tax treatment is generally available for qualified environmental cleanup costs you pay or incur before January 1, 2006.

Taxmap/pubs/p535-037.htm#TXMP6383009c Qualified environmental cleanup costs.

Qualified environmental cleanup costs are generally costs you pay or incur to abate or control hazardous substances at a qualified contaminated site.

Taxmap/pubs/p535-037.htm#TXMP33719e63 Hazardous substance.

Hazardous substances are defined in section 101(14) of the Comprehensive Environmental Response, Compensation, and Liability Act of 1980 and certain substances are designated as hazardous in section 102 of the Act. Substances are not hazardous if a removal or remedial action is prohibited under sections 104 and 104(a)(3) of the Act.

Taxmap/pubs/p535-037.htm#TXMP124ab29f Qualified contaminated site.

A qualified contaminated site is any area that meets both of the following requirements.

1. You hold it for use in a trade or business, for the production of income, or as inventory.
2. There has been a release, threat of release, or disposal of any hazardous substance at or on the site.

You must get a statement from the designated state environmental agency that the site meets requirement (2).

A site is not eligible if it is on, or proposed for, the national priorities list under section 105(a)(8)(B) of the Comprehensive Environmental Response, Compensation, and Liability Act of 1980. To find out if a site is on the national priorities list, contact the U.S. Environmental Protection Agency.

Taxmap/pubs/p535-037.htm#TXMP3428fbc0 Expenditures for depreciable property.

You cannot deduct the cost of acquiring depreciable property used in connection with the abatement or control of hazardous substances at a qualified contaminated site. However, the part of the depreciation for such property that is otherwise allocated to the qualified contaminated site shall be treated as a qualified environmental cleanup cost.

Taxmap/pubs/p535-037.htm#TXMP60c07273 When and how to choose.

You choose to deduct environmental cleanup costs by taking the deduction on the income tax return (filed by the due date including extensions) for the taxable year in which the costs are paid or incurred. The costs are deducted differently depending on the type of business entity involved.

Taxmap/pubs/p535-037.htm#TXMP3d7394d1 Individuals.

Deduct the environmental cleanup costs on the "Other Expenses" line of Schedule C, E, or F (Form 1040). If the schedule requires you to separately identify each expense included in "Other Expenses" write "Section 198 Election" on the line next to the environmental cleanup costs.

Taxmap/pubs/p535-037.htm#TXMP3b46aae9 All other entities.

All other taxpayers (including S corporations, partnerships, and trusts) deduct the environmental cleanup costs on the "Other Deductions" line of the appropriate federal income tax return. On a schedule attached to the return that separately identifies each expense included in "Other Deductions" write "Section 198 Election" on the line next to the amount for environmental cleanup costs.

Taxmap/pubs/p535-037.htm#TXMP47a2d415 More than one environmental cleanup cost.

If, for any taxable year, you pay or incur more than one environmental cleanup cost, you can choose to deduct one or more of such expenditures for that year. You can choose to deduct one expenditure and choose to capitalize another expenditure (whether or not they are of the same type or paid or incurred with respect to the same qualified contaminated site). A choice to deduct an expenditure for one year has no effect on other years. You must make a separate choice for each year in which you intend to deduct qualified environmental cleanup costs.

Taxmap/pubs/p535-037.htm#TXMP2b121255 Recapture.

This deduction may have to be recaptured as ordinary income under section 1245 when you sell or otherwise dispose of the property that would have received an addition to basis if you had not chosen to deduct the expenditure. For more information on recapturing the deduction, see Depreciation and amortization under Gain Treated as Ordinary Income in Publication 544.

Taxmap/pubs/p535-037.htm#TXMP20db2ff7 More information.

For more information about the environmental cleanup cost deduction, see Internal Revenue Code section 198.

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