Environmental Remediation Expense
The tax treatment of environmental cleanup costs is governed by the normal tax rules relating to the deduction or capitalization of expenses. So, the cost is deductible if it is an ordinary and necessary expense paid or incurred in carrying on a trade or business (Sec 162(a)), but must be capitalized if it's the cost of acquiring or constructing buildings, machinery, equipment, etc., that has a useful life extending beyond the tax year, or if it results in a permanent improvement or betterment made to increase the value of property (Reg Sec 1.263(a)). The cost is deductible if it is for an incidental repair that merely maintains property in an ordinary, efficient operating condition, and neither materially adds to the property's value nor materially prolongs its life. But the cost must be capitalized if it's needed to place property in an ordinarily efficient operating condition, or if the expenditure adds to the property's value, substantially prolongs its useful life, or adapts it to a new or different use. Rulings and cases:
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Expenses incurred to restore land that was contaminated by the taxpayer to its original condition are deductible. (Rev. Rul. 94-38)
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Expenses incurred for environmental cleanup when the property was acquired in a contaminated condition must be capitalized, because the expenses increase the value of the land. (United Dairy Farmers, Inc. v. United States, CA-6, 2001-2 ustc ¶50,680, 267 F3d 510)
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Expenses incurred to put land in condition for a new use must be capitalized, even if the expenses were incurred by the taxpayer under whose ownership the land was contaminated. (Dominion Resources, Inc. v. United States, CA-4, 2000-2 ustc ¶50,633, 219 F3d 359)