skip navigation

Search Help
Navigation Help

Topic Index

Tax Topics

About Tax Map Website
Publication 535

Environmental Cleanup Costs(p23)

Environmental cleanup costs are generally capital expenditures. However, you can elect to deduct these costs as a current business expense if certain requirements (discussed later) are met. This special tax treatment is generally available for environmental cleanup costs you pay or incur before January 1, 2012.

Environmental cleanup costs.(p23)

Environmental cleanup costs are generally costs you pay or incur to abate or control hazardous substances at a qualified contaminated site.
Hazardous substance.(p23)
Hazardous substances are defined in section 101(14) of the Comprehensive Environmental Response, Compensation, and Liability Act of 1980 and certain substances are designated as hazardous in section 102 of the Act. Also, petroleum products are treated as hazardous substances. However, substances are not hazardous if a removal or remedial action is prohibited under sections 104 and 104(a)(3) of the Act.
Qualified contaminated site.(p23)
A qualified contaminated site is any area that meets both of the following requirements.
  1. You hold it for use in a trade or business, for the production of income, or as inventory.
  2. There has been a release, threat of release, or disposal of any hazardous substance at or on the site.
You must get a statement from the designated state environmental agency that the site meets requirement (2).
A site is not eligible if it is on, or proposed for, the national priorities list under section 105(a)(8)(B) of the Comprehensive Environmental Response, Compensation, and Liability Act of 1980. To find out if a site is on the national priorities list, contact the U.S. Environmental Protection Agency.
Expenditures for depreciable property.(p23)
You cannot deduct the cost of acquiring depreciable property used in connection with the abatement or control of hazardous substances at a qualified contaminated site. However, the part of the depreciation for such property that is otherwise allocated to the qualified contaminated site shall be treated as an environmental cleanup cost.

When and how to elect.(p23)

You elect to deduct environmental cleanup costs by taking the deduction on the income tax return (filed by the due date including extensions) for the tax year in which the costs are paid or incurred. The costs are deducted differently depending on the type of business entity involved.
Deduct the environmental cleanup costs on the "Other Expenses" line of Schedule C, E, or F (Form 1040). If the schedule requires you to separately identify each expense included in "Other Expenses" write "Section 198 Election" on the line next to the environmental cleanup costs.
All other entities.(p23)
All other taxpayers (including S corporations, partnerships, and trusts) deduct the environmental cleanup costs on the "Other Deductions" line of the appropriate federal income tax return. On a statement attached to the return that separately identifies each expense included in "Other Deductions" write "Section 198 Election" on the line next to the amount for environmental cleanup costs.
More than one environmental cleanup cost.(p23)
If, for any tax year, you pay or incur more than one environmental cleanup cost, you can elect to deduct one or more of such expenditures for that year. You can elect to deduct one expenditure and elect to capitalize another expenditure (whether or not they are of the same type or paid or incurred with respect to the same qualified contaminated site). An election to deduct an expenditure for one year has no effect on other years. You must make a separate election for each year in which you intend to deduct environmental cleanup costs.


This deduction may have to be recaptured as ordinary income under section 1245 when you sell or otherwise dispose of the property that would have received an addition to basis if you had not elected to deduct the expenditure. For more information on recapturing the deduction, see Depreciation Recapture in Publication 544.

More information.(p24)

For more information about the environmental cleanup cost deduction, see Internal Revenue Code section 198.