Transferrable tax credits that a state awards for ridding contaminated property of hazardous substances do not have to be reported as income | Norton Rose Fulbright
Missouri awards a tax credit to companies that voluntarily clean up property. The amount varies. The state may award a credit for the full cost of the cleanup effort or for as little as whatever amount it feels it must offer to cause the cleanup to occur. The recipient can then use the tax credit to reduce its state income taxes or sell the credit to someone else. An active market has developed in the tax credits, with brokers arranging sales. Credits generally sell for 80% to 90% of face amount.
The IRS said in a memo — called a “technical advice assistance”— released in March that recipients do not have to report the value of such tax credits as income. If the recipient uses the credit to reduce state income taxes, this leads to a smaller deduction on its federal return for state income taxes paid. If, instead, the credit is sold to someone else, then the sales proceeds must be reported as ordinary income at time of sale.
The IRS said the sales proceeds are not capital gain — which would be taxed at lower rates than ordinary income — because the credits are not considered “property.” Only sales of “property” produce capital gain. The IRS memo is ITA 200211042.