Maximizing tax depreciation deductions for landfill costs
TAX BLOG |
Landfill owners typically incur numerous types of costs for 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. 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.
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.
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 their landfill costs.