Brownfields and Brownfields Remediation Expensing
The Issue · Position · Status · Talking Points · Resources
The Issue
Brownfields are abandoned or under-utilized commercial or industrial properties where expansion or redevelopment is hindered by real or perceived contamination. Cleaning up and reinvesting in these properties improves and protects the environment, increases local tax bases, facilitates economic growth and utilizes existing infrastructure for development.
Because of the threat of contamination, coupled with liability concerns, many developers and lenders have had a hands-off approach to brownfields. Redeveloping brownfields can become more expensive than unused "greenfields" and investors are sometimes reluctant to lend money for a site that can be greatly devalued, potentially very expensive to remediate and may create liability issues for new owners for previous environmental contamination.
As an incentive to redevelop brownfield sites, a federal brownfields tax provision allows developers to use the "expensing" method for reporting and deducting costs of remedial work at brownfield sites. Using that method, developers can fully deduct the costs of environmental cleanup in the year the costs were incurred. However, brownfield projects are often redeveloped by Limited Liability Corporations (LLCs) that exist for a single project or property. These businesses have difficulty taking advantage of the tax incentive because they do not generate the taxable income in the year that it is incurred. In order to make this important incentive more usable, it should include a carryover provision that allows the deduction to be carried forward until taxable income from the redevelopment can be earned.
The brownfields expensing provision, which is temporary, enjoys bipartisan support and is typically extended on an annual basis. The provision expired at the end of 2009 when the House and Senate failed to agree on a tax extender bill that contained a controversial increase on partnership carried interest. The provision was extended, however, in December of 2010, when the Obama Administration and Republican leaders agreed on tax legislation to extend current income and capital gains tax rates, and additional business tax provisions.
Position
The brownfields remediation provision expires at the end of this year, and must be extended or made permanent, allowing developers to include it in their redevelopment plans. In addition, a "carry forward" provision is needed to allow the expensing deduction to be used in future years, when taxable income from many of these redevelopments is earned, toward which the deduction can be applied.
Status
The Brownfields Remediation Expensing Incentive expired on December 31, 2011. NAIOP is working with Congress to ensure that the provision is included in tax extenders legislation in 2012.
Talking Points
- There are estimated to be around 500,000 brownfields sites in the United States that need to be redeveloped.
- On average, $1 of public investments in brownfields leverages $8 in total investments.
- As much as $2 trillion of real estate may be undervalued due to the presence of contamination.
- Congress should add a "carry forward" provision to allow the expensing deduction to be used in future years, when taxable income from many of these redevelopments is earned.
- The brownfields incentive contains a provision that would recapture the remediation deduction as ordinary income to the extent of gain upon sale of the property. If the gain is more than the amount deducted, the entire cost of remediation is taxable. If the gain is less than the amount of expense deducted, then all of the gain is taxable. The recapture provision would not apply to a leasing activity. The recapture provision should be eliminated.
Resources
Contact:
John Bryant
Senior Director of Federal Affairs
(703) 904-7100 ext. 162
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