New York’s Brownfield Cleanup Program was initiated over a decade ago to encourage private enterprise to redevelop contaminated properties and revitalize their surrounding communities. The program was recently extended, providing greater certainty that the incentives will continue to exist in the future, albeit at a lower level. Financial advisors of taxpayers with qualifying property should become familiar with the new requirements and engage the services of engineering consultants to maximize the potential tax benefits.
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In April 2015, New York passed its annual budget, which included a 10-year extension of the Brownfield Cleanup Program. The state tax credits available for developers who clean up and build on contaminated sites were supposed to expire at the end of 2015, but now have the necessary funding to continue.
Basics of the Program
The program began with tax years beginning on or after April 1, 2005. Taxpayers participating in the program [i.e., those entering into a Brownfield Site Cleanup Agreement (BCA)] could be eligible for three tax credits relating to the cleanup and redevelopment of a brownfield site. In order to be eligible, taxpayers had to apply to the program; qualified engineers normally assist with the application process and are vital in the performance of services and dealing with the various program administrators. When the BCA is approved by the Department of Environmental Conservation (DEC), the remediation work begins, and once a Certificate of Completion (COC) is issued by the DEC to the taxpayer, the site becomes a qualified site. The COC will include—
- acknowledgement that the requirements of the program were met,
- a description of the site information,
- restrictions on use of the site,
- the date of the BCA, and
- the applicable percentages used to determine the amount of the credit.
Tax credits are available to taxpayers as follows:
- Article 9 (transportation, telecommunications, utility service, farmers, cooperatives and agricultural cooperatives)
- Article 9-A (franchise tax on general business corporations)
- Article 22 (personal income tax, including partners in partnerships, shareholders of New York S corporations, and beneficiaries of estates and trusts)
- Article 32 (franchise tax on banking corporations; repealed as of Jan. 1, 2015; these entities are now subject to Article 9-A)
- Article 33 (franchise tax on insurance corporations).
Under the old rules, there were two cutoff periods: sites accepted before June 23, 2008, and sites accepted after June 23, 2008. Under the new rules, only the rules for sites accepted after June 23, 2008 apply, and thus this discussion is limited to those.
Components of the BCA Credit
The BCA credit is broken down into three main components. The site preparation credit includes costs that were paid or incurred to prepare a site for the COC, such as excavation, temporary electrical wiring, scaffolding, demolition, fencing and property, and services related to security. Costs not included in this credit are the cost of acquiring the site, amounts included in the basis of the property, or onsite groundwater remediation costs. The credit is allowed in the tax year in which the COC is issued; if site costs are incurred after a COC issuance of December 31, 2015, those costs will be associated with the credit calculated when the property involved is placed in service.
The second component, the onsite groundwater remediation credit, includes costs paid or incurred in connection with the remediation of onsite groundwater contamination and incurred to implement a requirement of the remedial work plan. Costs not included in this credit are the cost of acquiring the site or the site preparation costs. As with the site preparation credit, onsite groundwater costs that were paid or incurred to prepare a site for the COC are allowed in the tax year in which the COC is issued.
Following the passage of this amendment , taxpay ers can now be comfort able in the fact that the program will remain in place for the near future.
The final component, the tangible property credit, includes the cost of the property plus any improvements not already included in the above credits. The tangible property credit can be taken once the COC is issued and the property has been placed in service.
The tax forms used for the credit are CT-611.1 (corporate taxpayers) or IT-611.1 (flow-through or individual taxpayers). The credit is calculated based on percentages assigned by the DEC, which appear in the COC that the taxpayer receives upon site approval; these percentages, typically ranging between 10% and 50%, are applied against applicable costs to determine credits permitted. Note that these credits are refundable.
The above refers to the original program, prior to its extension. Effective July 1, 2015, significant changes have been made to the program. The December 31, 2015, deadline was extended to March 31, 2026, for any sites that enter the program after the July 1, 2015, effective date. If a site entered the program before the July 1, 2015, effective date, the older, more lucrative tax credit calculation can be used; if a site entered the program on or after July 1, 2015, then tax credits are limited to the new, lower amounts.
Additional requirements also apply to properties located in New York City. Under the new rules, for sites to be eligible for the tangible property tax credit, they must be—
- located in an Environmental Zone;
- “upside down,” meaning that the cleanup cost is 75% or more of the property value; or
- redeveloped as affordable housing proj ects.
In addition, a shortened and simplified “EZ” version of the Brownfield Cleanup Program is possible, which streamlines the process for lightly contaminated properties. The EZ version of the program does not allow tax credits, however, and entails changes to key definitions and site eligibility requirements. Under the new program, the definition of a brownfield site now requires the site to actually be contaminated, and this level of contamination is held to a higher standard by the DEC. In addition, only costs associated with the actual remediation will be allowed as part of the credit calculation. Furthermore, many of the percentages used for the credit will drop to between 5% and 12%. Finally, the new tax forms are CT-611.2 and IT-611.2.
As an illustrative example, a property accepted after June 23, 2008, but before July 15, 2015, change, incurs site preparation costs of $400,000, groundwater remediation costs of $500,000, and an allowed percentage of 25%, the New York State tax credit would be $225,000 ($900,000 × 25%). If excess credit remains after the total New York State tax is absorbed, that excess is refundable.
Following the passage of this amendment to the Brownfield Cleanup Program, taxpayers can now be comfortable in the fact that the program will remain in place for the near future—even though it is no longer as lucrative as before. Engineers are an integral part of this program and will need to be consulted throughout the process, which can often run for several years.