/ IN THIS BLOG
01 / Introduction : Environmental Remediation and GAAP
If you anticipate or have incurred costs for removing contaminants from soil, groundwater, surface water, etc. (aka environmental remediation), then you’ll need to decide at tax time whether you have to capitalize those outlays or “expense” them.
Let’s begin with the caveat that MCF is not in the business of giving tax advice. That’s between you and your accountant, or in thornier cases, your tax attorney.
However, since CPAs and JDs will commonly charge you three-digit sums per hour for their ultimate advice, it pays to gird yourself with some knowledge and nomenclature to speed things up a bit. You don’t want to be paying for a very expensive Accounting 101 lecture.
Per credible sources, most money you spend on environmental remediation can be tax-deductible as ordinary business expenses. But some of these costs must be spread over multiple years for tax purposes, i.e. capitalized.
That said, it’s wise to investigate the tax impact of an environmental remediation project before you start one. Or if you’ve already completed it, to review the costs closely with your accountant prior to filing your tax return for the year the expenses were incurred.
02 / Understanding capitalization
- For your accountant, capitalization refers to when a cost is included in the value of an asset. (We’ll unpack that by way of example a few paragraphs from here.)
- Conversely, when your banker speaks to capitalization, as when you’re seeking a business loan, the conversation is about your company's total debt and equity.
03 / Capitalization vs “expensing”
“Expensing” involves treating expenditures as operating costs rather than as capital investments, so that they’re immediately deducted from income. In contrast, “capitalizing” (per 1) adds the asset bought by the expenditure to your balance sheet to be depreciated over time. More precisely:
This means you deduct the entire cost of something in the same accounting periodduring which you bought it. You can only do this if that something will be used, consumed, or otherwise expire during that accounting period (typically a year).
Conversely, if you incur a cost for something that will last beyond the accounting period (e.g. a year), then it must be “capitalized” because it continues to have economic value into a finite future—and thereby you must list it as an asset.
04 / Some capitalization examples
Imagine you spend $1,000 on something that you expect to last ten years. Rather than report a $1,000 expense immediately, you list it on your balance sheet as an asset worth that amount. Then, you depreciate it yearly over the course of ten years, taking an “expense” deduction each accounting period for it.
Now, what might be that “something?”
Paraphrasing Law Insider, environmental remediation costs are all those associated with preliminary assessments, site investigations, remedial investigations, feasibility studies, and remedial actions.
A conversation with your accountant should also touch upon direct and indirect capital costs; department fees and oversight costs; engineering costs; annual operation, maintenance and monitoring costs; costs for CPAs or independent auditors—and more.
The exact depreciation method that your accountant will recommend varies by situation, depending on how you might realize the greatest tax benefit.
Two of the most common techniques of depreciation (aka amortization) are (1) the straight-line method, which spreads the cost of the fixed asset evenly over its useful life; and (2) the declining‑balance method, which results in higher depreciation “expensing” in earlier years.
05 / Which environmental remediation costs can be expensed vs capitalized?
Per the same source, environmental remediation costs can be expensed to the extent that they’re somewhat incidental. Some examples might be outlays for asbestos encapsulation, environmental studies, surveys, investigations, engineering, as well as consulting and legal fees.
Conversely, an environmental remediation cost must be capitalized if the expenditure increases the value of the remediated property, prolongs its useful life, or adapts it to a new or different use. You’ll also likely need to capitalize if the remediation makes up for depreciation, amortization, or depletion that you’ve been claiming for tax purposes.
06 / The upshot
Although the choice between expensing and capitalizing environmental remediation costs might seem initially straightforward, prudence dictates that you consult your accountant to decide between the two.
For evidence, peruse Section 198 of the Internal Revenue Code, which speaks directly to the subject. (N.B. It’s not light reading.) What’s most salient is that sometimes you can choose to capitalize an environmental remediation cost. But many times you haven’t a choice.
As well, expensing of environmental remediation costs might be most advantageous for small businesses. But larger ones, especially those with impatient investors, might better capitalize such expenses. This is because expensing is subtracted from profit statements, whereas capitalized costs are added to a company’s asset sheet.
Again…consult your accountant.
07 / Where to start when you don’t know where to begin
MCF offers 30+ years of experience and expertise helping a wide range of enterprises manage their hazardous, universal, regulated-medical, and/or industrial waste We deliver solutions that maximize efficiencies, minimize waste extraction and disposal costs, and reduce compliance risks.
Our comprehensive familiarity with hazardous-waste management and hazardous‑waste disposal together with our local regulatory expertise allows us to provide initial guidance for a wide range of environmental compliance issues, effectively showing you where to start when you don’t know where to begin.
Contact us for expert advice today. Or call 866-315-8116.
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