Maximizing tax depreciation deductions for landfill costs
INSIGHT ARTICLE |
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)