Cherrytree Group LLC Blog

The U.S. Environmental Protection Agency (EPA) estimates that there are 450,000 brownfields sites throughout the country. To some commercial property owners, brownfields are seen as a major expense. To others, they are a potential financial windfall.

That is because of a tax credit included in the Brownfields Act: Chapter 206 of the Act of 1998, which was created as an incentive for developers to reclaim polluted property, as well as to stimulate economic growth by restoring abandoned properties, putting them back into use, and thereby creating jobs and generating property, excise, and income taxes from land that otherwise would lie fallow.

Under Mass. General Law Chapter 21E, if you buy (or control) polluted commercial property or if someone contaminates commercial property you own, you are responsible for cleaning it up. What many owners don't know is that they may be able to get the Commonwealth of Mass. to split the cost of that cleanup.

How the Brownfields Tax Credit Works
To use a real-life example, a developer wants to determine if they qualify for the credit. They spent in excess of $2 million to clean up the site of a commercial office building. If successful, they could receive a tax credit in excess of $1 million. They have the ability to offset 50% of their taxes in the current year, or carry the credit forward for an
additional 4 years (for a total of 5 years) in order to use the credit to offset taxes. The credit is also transferable, so the developer may choose to sell it.

Practically any costs "directly" relating to an environmental clean-up can qualify for the credit, including the cost to assess, contain, remove or otherwise respond to the contamination. Covered expenses may include the costs of LSP services, engineering, contractors, laboratory analyses and testing, legal fees, DEP and other agency fees.

For a project to qualify, it must meet all of the following criteria:

• The environmental damage must have been reported to the Mass. Department of Environmental Protection (DEP) and a permanent solution to clean the property and keep it clean must have been achieved. If the source of the pollution continues to contaminate the property, it will not qualify for a tax credit,
• The implementation must be conducted based on the Mass. Contingency Plan, generally under the direction of a licensed site professional, * The property must be located in an economically distressed area (EDA), as determined by the DEP. Mass. alone has 351 cities and towns, of which 233 of them are either completely or partially in an EDA, including Boston,
• The cost of the clean up must exceed 15% of the appraised value of the property at the time of clean-up,
• The owner must be in good standing with the DEP, with no violations of any environmental restrictions, orders or mandates, and
• The property must be used for business purposes.

If a project fails to qualify for the 50% credit, it may still qualify for a 25% credit if the cleanup uses an activity and use limitation, which specifies allowable and prohibited uses for the property.

According to Warren Kirshenbaum, president of Cherrytree Group, LLC, a tax credit consultant and syndicator, "The market for brownfields tax credits is very strong. We have sustained demand for these credits, and have recouped millions of dollars of our clients expenditures by using this credit."

Take Advantage Before Credits Expire
In 2010 the deadline for applying for the credit was extended to January 1, 2014. The tax credit is transferable and can be carried forward for up to five years. Therefore, even if the taxpayer does not qualify for the credit they can lower their tax burden by purchasing credits from other companies at a discount.

The state brownfields tax credit can also be used in conjunction with other grants and tax credits, such as the federal historic rehabilitation tax credit, which is for projects listed on the National Register of Historic Places. Anyone who owns a brownfield site that may qualify should seek professional advice quickly, while the act is still in place.

If you think your project qualifies for a brownfields tax credit, contact Warren Kirshenbaum to help gather and document expenses, and to file the necessary paperwork.

This article was written by Robert Calzini, DiCicco, Gulman & Co. LLC with whom we often work.

Expiration of the payroll tax deduction, changes to the capital gains tax rates, expiration of the Bush-era tax cuts, health insurance mandates, and diverging opinions between Democrats and Republicans on how to reform the Tax Code are creating much anxiety for both business and individual taxpayers alike. Tax issues are of paramount importance to businesses when faced with investment, expansion, or hiring decisions, and in the case of smaller businesses these decisions often flow through to the principals’ tax planning strategies.

Regardless of your political affiliation, the availability and usage of mechanisms that aid tax planning are important economic drivers. This article focuses on highlighting the role of tax credits as an economic engine, rather than their incorrect labeling as “subsidies”, particularly when they originate from the creation of renewable energy. The demise of companies such as Evergreen Solar and Solyndra, which received expensive loan guarantees or other subsidies only to fail spectacularly, costing taxpayers vast sums has only added to the political distaste for subsidies.

Tax credits, are an incentive that allows the outsourcing of governmental functions to the private sector. Tax credits, which allow a taxpayer an offset against taxes due, usually dollar for dollar, or are sale-able in the marketplace create a financing source for projects that otherwise would not exist. There are tax credits for remediation of environmentally contaminated properties, rehabilitation of historic buildings, producing renewable energy, and the creation of affordable rental housing, to name a few. The market for tax credits is fluid and vibrant, and it is important that the market for these tax credits remains strong. Take the conversion of biomass into renewable energy. Technologies that can perform such a conversion create energy and avoid the need to landfill industrial waste, yet these deals are difficult to finance through traditional lending channels. Generating tax credit equity for such ventures, while providing tax planning benefits to buyers of tax credits, such as large corporations, institutions, and individuals frees up businesses to invest in equipment, personnel, upgrades and other business needs that would inevitably be scrapped if these dollars were being paid as taxes.

Warren Kirshenbaum is the president of Cherrytree Group, LLC, Newton, Mass., a tax credit consultant, broker, and syndicator.

The sale of certain Massachusetts state tax credits from the original recipient to a third party creates a taxable event for both the Taxpayer and the Recipient. While the Memorandum only applies to Massachusetts state tax credits, the precedent that Chief Counsel relied upon could be applied to other state tax credit programs.
   
Massachusetts offers a number of state tax credits similar to those found throughout the United States, specifically, Brownfields Tax Credits, Motion Picture Tax Credits, Historic Rehabilitation Tax Credits, Low-Income Housing Tax Credits, and Medical Device Tax Credits.

In the Memorandum, the IRS found that the Taxpayer that qualifies for and receives the tax credit does not realize gross income.  Instead, for federal income tax purposes, the receipt of the tax credit itself should simply be treated as a reduction or potential reduction in the recipient’s state tax liability.  

However, in the event the tax credit is transferred to a third party for value, the Taxpayer must recognize a gain because the transaction is treated as a sale. The amount of the gain recognized by the Taxpayer is equal to the sale price of the tax credits, and because each of the nonrefundable Massachusetts tax credits qualifies as a “capital asset” the gain is deemed a capital gain.

For information and assistance on buying or selling Tax Credits, contact the Cherrytree Group.

Original article - Lexology