Topic 63
Environmental Remediation Expenses
Topic 63 provides an overview of the tax treatment of postclosing environmental remediation expenses incurred by the buyer.
OVERVIEW
- Generally, the expenses incurred by a buyer associated with the cleanup of a transferred environmental condition existing at the closing, either assumed or purchased by the buyer, are not tax deductible by the buyer as incurred.
- Such incurred expenses increase the tax basis of the property (as an improvement) and are deductible only when the property eventually is sold (or abandoned).
- The present value of the cash flow required to clean up a transferred existing environmental condition is often the subject of considerable negotiation. Eventually an agreed amount is offset against the pre-environmental total deal consideration.
- Generally, expenses incurred associated with the cleanup of an environmental condition caused by the buyer after the closing are tax deductible, as shown:
- The expenses are capitalized into inventory and are deducted as part of cost of goods sold as inventory turns over.
- Such expenses maintain the value of the acquired property.
- Fixed assets employed in remediation of buyer-incurred pollution follow fixed asset accounting treatment, resulting in tax-deductible depreciation expense.
