The brownfields tax incentive in section 198 of the Internal Revenue Code expires on December 31, 2007. It was first enacted in the Taxpayer Relief Act of 1997 ( P.L. The 110 th Congress may consider another short-term (or long-term) extension, making the tax extension permanent, or allowing it to expire. Another possibility is to repeal the recapture provision. First enacted as part of the Taxpayer Relief Act of 1997 ( P.L. 105-34 ), the incentive allows a taxpayer to fully deduct the costs of environmental cleanups in the year the costs were incurred (called "expensing"), rather than spreading the costs over a period of years ("capitalizing"). To take advantage of the brownfields tax incentive, the developer of a property has to obtain a statement from the state environmental agency that the parcel is a "qualified contaminated site" as defined in the law. Since FY2003, the Administration's budget proposals have proposed making the tax incentive permanent. This extension through 2007, which was enacted on December 20, 2006, was made retroactive to December 31, 2005, when the previous extension expired. In 2004 the IRS introduced a new form, Schedule M-3, which provides information, for the first time, on the use of the section 198 brownfields tax incentive. Use of the schedule was phased in, and in the first year of use, tax year 2004 (for returns submitted in 2005), only some corporations and no partnerships were required to file it. The results for 2004 only recently became available, and show section 198 remediation costs of $294,970,000, reported by 110 corporations out of a population of 5,557,965 corporate returns. This information is obviously limited, since the response for 2004 excluded more than half the corporations and all the partnerships, response on the brownfields tax incentive was at the corporations' discretion, and it was limited to those companies with assets of $10 million or more. Partnerships with assets over $10 million were required to use Schedule M-3 beginning with tax year 2006, and those results will be available in February 2009. CRS Survey Findings

CRS surveyed the appropriate environmental agency in each state in 2003, and again in 2007, to determine the number of brownfield certifications they had issued. In 2003, 27 states reported that since the enactment of the provision in August 1997 until the time of the survey in April-June 2003 they had received a total of 161 requests for certification, of which 147 were approved, and 14 were denied. In 1999, as Congress was considering making the tax incentive permanent, Treasury estimated it would be used to clean up 18,000 brownfields over the next 10 years (1,800 per year); the department anticipated that the loss in revenue resulting from the tax incentive would be $600 million for 5 years ($120 million per year), and that it would induce an additional $7 billion in private investment. CRS also contacted four private developers and the editor of a brownfields trade publication to solicit their viewpoints on the subject, as well. Nineteen states reported in both the 2003 and 2007 surveys that they had received no applications for certification. That information will be available in February 2009.
What was regarded as a key brownfields tax incentive in the Internal Revenue Code expires on December 31, 2007. Originally enacted in the Taxpayer Relief Act of 1997 (P.L. 105-34), the provision allows a taxpayer to fully deduct the costs of environmental cleanup in the year the costs were incurred (called "expensing"), rather than spreading the costs over a period of years ("capitalizing"). The provision was adopted to stimulate the cleanup and development of less seriously contaminated sites by providing a benefit to taxpaying developers of brownfield properties. It also contains a "recapture" provision, which diminishes its benefits. In each of its budget proposals since FY2003, the administration has proposed that Congress make the incentive permanent. The 109th Congress renewed the provision (for the fourth time) through 2007 (P.L. 109-432) and made it effective retroactively to December 31, 2005, when the previous extension expired. The law also made sites contaminated by petroleum products eligible for the tax incentive. The 110th Congress may consider a variety of options, including granting another extension, making the incentive permanent, allowing it to expire, or repealing the recapture requirement.
Until recently, information on the extent of use of the brownfields tax incentive could not be determined from federal income tax returns. Use of a new tax form, Schedule M-3, for corporations and partnerships with assets over $10 million began being phased in with tax year 2004. The first of those data, covering the 2004 tax year, became available in February 2007. They showed that section 198 environmental remediation costs of $295 million were reported by 110 corporations, out of a population of 5,557,965 corporate returns. This information is understated because it excluded more than half of all corporations, and all partnerships.
To take advantage of the tax break, a developer has to obtain a certification from the state environmental agency that the site qualifies as a brownfield. CRS surveyed the agencies of all states in 2003, and again in 2007, to ask how many certification applications they had received and approved. In 2003, 27 states reported that they had received a total of 161 applications since enactment in 1997, of which 147 were approved. In 2007, 29 states reported that they had received 175 applications over the previous four years, of which 170 were approved. The results were somewhat surprising; before enactment in 1997 the Treasury Department and the Environmental Protection Agency had expected it to be used as many as 10,000 times per year.
Accordingly, CRS also asked the state agencies, four private developers, and the editor of a trade publication for their views on why the tax incentive was so little used. There was divided opinion on the utility of the tax incentive, and criticism of its stop-and-go nature due to its expiration and renewal every one or two years. The Schedule M-3 data for firms with more than $10 million in assets confirm the CRS survey findings of modest use of the section 198 brownfields tax incentive. The tax form was fully phased in with tax year 2006, and full information will be available in February 2009. However, as discussed in this report, it appears that the section 198 tax break is a useful tool in some brownfield situations.