Maximizing tax depreciation deductions for landfill costs
INSIGHT ARTICLE |
Authored by RSM US LLP
This article was originally published on March 2, 2017 and has been updated.
Landfill owners typically incur significant costs related to the acquisition of land, related preparation, and regulatory approval to fill on that land. However, many owners do not properly recover all of the associated costs—including a portion of the land itself—via depreciation deductions. Taxpayers may either be treating the land as either a non-depreciable asset, or fail to use the most advantageous cost recovery depreciation methods for landfill costs.
The units-of-production depreciation method is an alternative depreciation method that landfill owners can utilize to recover landfill costs based on the tonnage accepted into the fill per year. This is usually significantly more beneficial than using traditional recovery periods under the modified accounting cost recovery system (MACRS), or even worse, not recovering any of the basis of the land at all. Alternatively, taxpayers that are deducting landfill costs as a current expense may be exposing themselves to IRS exam risk, as they are not properly matching the timing of these expenditures with the income they generate.
Typically the cost of land is non-depreciable for tax purposes, since land is generally considered a non-wasting asset. However in the case of landfills, the land very much wastes and is generally unusable after being filled. Therefore, land, or a portion of the land, has zero salvage value after being completely filled. By utilizing a units-of-production depreciation method, taxpayers can generally recover land acquisition costs in excess of salvage value, effectively incorporating a portion of the cost of land into a depreciation calculation. Further, ancillary costs such as site preparation, excavation, construction, site/cell design, infrastructure, environmental studies, permitting expenditures, easements, buffers, and berms that are otherwise capitalizable can also be included in the depreciation calculation.
Taxpayers in landfill industries commonly divide the landfills into separate “cells” for filling the airspace above the land. Each cell requires regulatory permits before it can be filled, and capacity studies are routinely updated as filling occurs. It is necessary to update depreciation calculations as time goes on to incorporate the results of updated capacity studies, and to properly allocate additional permitting costs to the associated cells.
For landfill owners, while certain costs are depreciable, there are also costs that can be deducted immediately. Section 468 permits a taxpayer to make an election with respect to mining or waste disposal property to deduct qualified reclamation or closing costs for a tax year equal in an amount to the current reclamation or closing costs allocable to that year. In Gregory v. Commissioner, the Tax Court addressed whether landfill owners using the cash method of accounting could deduct estimated clean-up costs (i.e. closure costs) under section 468. The Tax Court concluded that the term “taxpayer” in Section 468 refers to cash method taxpayers, as well as accrual method taxpayers, and landfill owners that use the cash method of accounting for tax purposes can deduct estimated future reclamation, closure, and post closure costs under section 468.
Owners of landfills should review their capitalization policies and methodology for tax purposes to see if they are properly capitalizing all required costs to the basis of the landfill, and to determine if they are using the most advantageous cost recovery mechanism to depreciate any landfill costs. Additionally, landfill owners should review their tax accounting methods to ascertain all appropriate costs are being deducted in the correct period. At RSM, our accounting methods tax specialists have a comprehensive understanding of the cost recovery process of landfills and their ancillary costs, and can help you evaluate and maximize your cost recovery opportunities and assist with any specific accounting method issues related to landfills.
 149 T.C. No. 2 (2017)
Call us at +1 213.873.1700, email us at email@example.com or fill out the form below and we'll contact you to discuss your specific situation.
This article was written by Justin Silva, Christian Wood, Rida Abbasi and originally appeared on 2021-08-30.
2021 RSM US LLP. All rights reserved.
The information contained herein is general in nature and based on authorities that are subject to change. RSM US LLP guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. RSM US LLP assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein. This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer.
RSM US Alliance provides its members with access to resources of RSM US LLP. RSM US Alliance member firms are separate and independent businesses and legal entities that are responsible for their own acts and omissions, and each is separate and independent from RSM US LLP. RSM US LLP is the U.S. member firm of RSM International, a global network of independent audit, tax, and consulting firms. Members of RSM US Alliance have access to RSM International resources through RSM US LLP but are not member firms of RSM International. Visit rsmus.com/about us for more information regarding RSM US LLP and RSM International. The RSM logo is used under license by RSM US LLP. RSM US Alliance products and services are proprietary to RSM US LLP.
Vasquez & Company LLP is a proud member of the RSM US Alliance, a premier affiliation of independent accounting and consulting firms in the United States. RSM US Alliance provides our firm with access to resources of RSM US LLP, the leading provider of audit, tax and consulting services focused on the middle market. RSM US LLP is a licensed CPA firm and the U.S. member of RSM International, a global network of independent audit, tax and consulting firms with more than 43,000 people in over 120 countries.
Our membership in RSM US Alliance has elevated our capabilities in the marketplace, helping to differentiate our firm from the competition while allowing us to maintain our independence and entrepreneurial culture. We have access to a valuable peer network of like-sized firms as well as a broad range of tools, expertise and technical resources.
For more information on how Vasquez & Company LLP can assist you, please call +1 213.873.1700.
Subscribe to receive important updates from our Insights and Resources.