Key Insights into Brownfields Tax Credit Terms & Definitions
James T. Curtis, PE, LSP President, Cooperstown Environmental LLC
Massachusetts has a well-established incentive program designed to provide financial relief to innocent parties (“Eligible Persons” is the term in the law) who incur significant costs to remediate contaminated properties. There is a significant amount of information available about the program available on-line, including the application forms, so it may be tempting to conclude that the process is obvious, or at least straightforward. The reality, however, is that there are many traps and dead-ends that can cause hopeful recipients to inadvertently miss out on recovering eligible costs or, in some unfortunate cases, to lose eligibility altogether.
Some of the key terms that appear in the statutory language for businesses are described here with key insights into how these terms are interpreted by the state Department of Revenue (DOR), which reviews all applications. Note that a parallel statutory section pertains to individuals with very similar language and terms.
- Business Corporation
any corporation, LLC, trust, etc. may qualify. The entity should be established and documented in the Secretary of State’s database.
- “achieves and maintains a permanent solution or remedy operation status”
Eligibility for the credit becomes available upon the filing by the LSP of the final cleanup report (Permanent Solution Statement) with the DEP or the achievement of Remedy Operation Status (ROS).
- “in compliance with chapter 21E”
The credit is for work conducted pursuant to the Massachusetts Contingency Plan (MCP) and M.G.L. c. 21E. DOR has started interpreting this to exclude asbestos expenses because, they say, asbestos is not a 21E issue. Work conducted pursuant to the Solid Waste regulations has also been ruled ineligible due to this clause.
- “25% with an AUL; 50% without an AUL”
The credit granted is 25% of the eligible costs if there is an Activity and Use Limitation (AUL) on the property at the time of the application, and 50% without an AUL, providing an incentive to go further with the cleanup to remove all or most of the contamination.
- “it owns or leases”
The applicant has to be either an owner – meaning a deed in the name of the entity – or a lessee, meaning a leasehold interest. The deed has to be recorded with the Registry or filed with the Land Court; the date of ownership for tax credit purposes is the date of recording or filing (not the date the deed is signed). The lease will be reviewed to confirm there is “consideration” and that it is a legitimate lease. The lease payments cannot go toward the purchase or it will be discounted.
DOR interprets the active tense (“owns or leases”) to mean that any costs incurred prior to or after the dates of ownership are not eligible – this determination is based on the date of the service provided, not the date of the payment. So, for example, incurring an expense prior to purchase but paying for it at closing does not make a cost eligible.
- “business purposes”
This phrase excludes residential cleanups HOWEVER constructing residences qualifies as a business purpose. The key is that the construction is a business purpose even if the building is used residentially.
- “economically distressed area”
The credit is available only in certain areas, primarily EDAs (but also former Manufactured Gas Plant or MGP sites). There is a process to qualify a town or city, or portion thereof, as an EDA if the area is not so listed currently.
- “not less than 15 per cent of the assessed value of the property before remediation”
The eligible costs are compared to the municipal assessment of the property prior to the cleanup and must exceed a minimum threshold. DOR has interpreted this to mean the assessed value as of the first expense incurred or the date of purchase. Neither the purchase price nor the appraised value is relevant.
- “eligible person”
This is a definition from c. 21E and means that you didn’t cause or contribute to the contamination or own the property when the contamination occurred. Typically, easy to prove for developers or other new owners.
- “not subject to enforcement action”
This means that DEP has not dinged you for violations of 21E – and almost never a problem since by definition the filing of a Permanent Solution report implies that all compliance issues have been addressed.
Theoretically you can be granted a tax credit and have it reversed or “clawed back” later. In 20+ years I believe this still has never occurred. Not a major worry and the statutory language provides defenses; however, this possibility does often cause concern among applicants and their legal counsel.
- “net response and removal costs”
This is the fun part. The key words in the definition are “for the purposes of achieving a permanent solution or remedy operation status in compliance with chapter 21E” and that phrase guides what is allowed. DOR has become increasingly strict and literal. The costs must be 21E costs (“costs are eligible for consideration as net response and removal costs where such costs are a direct and necessary part of attaining a permanent solution”).
DOR’s attention is most focused on differentiating between construction costs and remediation costs. They have realized that in the past many applications tried to blur the boundary so that all or many costs incurred became remediation; the auditors are cracking down – in some cases, too much so in my opinion – and trying to exclude whatever they can. This is where the art and science of the application comes in.
The credit is good for as many as six tax years (the year of submitting the Permanent Solution or ROS plus up to five carryover years). There are limitations on the use of the credits. Most credits are sold on the secondary markets.
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“Ask Mr. Brownfield” is a regular column regarding the highly-acclaimed Massachusetts tax credit program for reimbursements of environmental expenses. Jim Curtis is an acknowledged expert with more than 15 years of industry-leading experience and knowledge; Cooperstown Environmental LLC of Andover has completed hundreds of successful applications for its clients.