Environmental Cleanup Cost Deduction

This deduction provides businesses with an incentive to clean up certain sites that are contaminated with hazardous substances. Your business does not have to be in an empowerment zone, enterprise community, or renewal community to qualify for this deduction.

You can choose to deduct "qualified environmental cleanup costs" in the tax year you pay or incur the cost. You can do this instead of adding the cost to the basis of your property (and, if the property is depreciable, recovering the cost by taking depreciation deductions over a specified recovery period).

This special tax treatment is generally available for qualified environmental cleanup costs you pay or incur after August 5, 1997, and before January 1, 2004.

Qualified environmental cleanup costs. Qualified environmental cleanup costs are generally costs you pay or incur to abate or control a hazardous substance (as defined by Internal Revenue Code section 198(d)) at a "qualified contaminated site."

Qualified contaminated site. A qualified contaminated site must meet 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 a 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.

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 elected this deduction.

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

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