Environmental Cleanup

Environmental Cleanup

August 01, 2005

Environmental cleanup costs where a manufacturer pollutes his own land and groundwater must be offset against revenue from sales of his products.

The IRS explained in a ruling in June how to offset the cleanup costs against sales revenue. In each of the cases, the manufacturer was allowed to deduct the full cleanup costs against revenue from sales of product during the year the cleanup occurred. The IRS said it does not matter whether there is still manufacturing at the contaminated site that year if the taxpayer is manufacturing at another site. It also does not matter whether the manufacturer was legally obligated to clean up while the pollution was occurring or that the pollution built up over time. The ruling is Revenue Ruling 2005-42.

Anyone generating electricity is a manufacturer.

It was important that the cleanup merely restored the site rather than improved it. Otherwise, the cleanup costs might have to be added to the “tax basis” in the land and would not be deductible.