The Commonwealth of Massachusetts first created the Brownfields tax credit in 1998 and amended the legislation in 2006 to allow the credits to be transferred, sold or assigned. This credit provides an incentive to developers to cleanup qualifying sites in the form of tax credits useable against Massachusetts income tax. Both for-profit and not-for-profit developers are eligible to receive the credit and generally sell the credit to third parties. Purchase of the credits affords its investors an opportunity to save on state taxes, while supporting environmental cleanups in the state.
Eligible properties must meet the following three conditions: (1) the property is owned or leased by the taxpayer for business purposes, (2) the property has been reported to the Massachusetts Department of Environmental Protection (“MassDEP”) and (3) the property is located in an economically distress area (Economic Target Area qualifies).
Amount of the Brownfields Tax Credits
If an Activity and Use Limitation (“AUL”) is used, the credit amount is 25% of the net response and removal costs. If an AUL is not, the credit amount is 50% of the net response and removal coast.
Criteria for Application
1. The site was cleaned up under the guidance of a Massachusetts Licensed Site Professional (LSP). 2. The party conducting the investigation/remediation did not cause or contribute to the contamination, i.e. they were not responsible for the environmental issue to begin with. 3. The environmental cleanup costs must exceed 15% of the assessed value of the property prior to the response action on or before remediation. 4. Costs must have been incurred since August 1, 1998 and through January 1, 2012
Impact of Other Financial Aid
The amount of any federal or state funds or grants is deducted from the expense base for which the credit is available.
What This Means for the Investor
A tax credit certificate is issued and then the taxpayer purchases credits at a discounted price. The taxpayer is issued a certificate that is attached to their tax return providing a dollar for dollar credit against their state tax due. The IRS issued a Private Letter Ruling allowing the taxpayer a deduction on their Federal Tax Return equal to the amount of the Massachusetts tax credit certificate. The taxpayer must recognize as additional income the difference between the discounted amounts paid for the state certificate and the face value of the certificate.
For example, if the taxpayer purchases $100,000 of tax credits at a price of $.90, the cost to the taxpayer is $90,000. Massachusetts income tax is reduced by $10,000 for an investment of $90,000. The $90,000 can be deducted for Federal tax purposes.
It is ideal to buy the credits as close as possible to when estimated tax payments or actual tax payments are due. If the taxpayer buys 2009 tax credits on March 1, 2009 and applies them toward tax payments due on April 15, 2009, $10,000 is saved in taxes for $90,000 being invested for 45 days. For the taxpayer who may face an under payment of estimated tax situation, this purchase, which lowers the total tax liability, would concurrently lower penalties attributable to the under payments of January, April, June, and September 2009 tax obligation.
If a taxpayer is in a situation where they are paying Federal Alternative Minimum Tax (AMT), this program is even more beneficial. The AMT does not allow state income taxes as an itemized deduction. Therefore, a smaller state income tax helps reduce the AMT burden.
These Massachusetts tax credits are a direct dollar for dollar offset against state income tax liability. The maximum amount of the credit allowed in any year cannot exceed 50% of the tax owed by the taxpayer. To the extent that the tax credits received by a taxpayer exceed tax liability, the tax credit can be carried forward for up to five years. The credits may not be carried back against prior year’s taxes.
These credits are available for both the corporate or individual taxpayer.
All respective purchasers should consult their accountant or attorney regarding the applicability of these tax credits to their individual tax situation and the above description should not be construed as tax or legal advice.