Replacement of Underground Storage Tanks at Retail Gasoline Stations
Under regulations issued by the Environmental Protection Agency, petroleum companies and independent marketers owning and operating gasoline stations are required to remove and replace leaking underground storage tanks and to clean up any related contamination. The question arises as to whether the substantial costs of removal, replacement, cleanup, and monitoring are capital expenditures or are currently deductible expenses.
Costs of Removal and Replacement of a Tank
The Internal Revenue Service has concluded that the costs of removing an old tank, the cost of the replacement tank, and the installation of the new tank must be capitalized. These costs are capital expenditures, not deductible repairs, because the new tank is a replacement of a major component of the fuel distribution system and it increases the value and life expectancy of the asset as a whole.
The costs of removal include expenditures made to remove any concrete or paving material, the costs of digging to access the old tank, and the cost of lifting the old tank out of the ground.
However, the costs of cleaning and disposing of an old tank are currently deductible as expenses incurred in the ordinary course of business. These costs are not incident to the creation of a capital asset and do not enhance a capital asset or create significant long-term benefits. In addition, the costs incurred to cleanup up soil or groundwater contaminated by a leaking tank may be deducted as business expenses.
The costs of constructing and installing groundwater treatment facilities and monitoring equipment are capital expenditures because they generally have a useful life substantially beyond the tax year in which they were constructed or installed. Therefore, they are not currently deductible expenses.
Removal of Tanks Without Replacement
If a petroleum company or independent marketer removes a leaking tank but decides not to replace it, the costs of the removing, cleaning, and disposing of the tank are currently deductible. In this case, the taxpayer is neither replacing a major component of the fuel distribution system nor increasing the value or useful life of the asset.
The costs incurred to remediate soil and groundwater contaminated by leaking tanks during the course of business operations are deductible as business expenses without regard to whether the tank is being replaced because the cleanup costs do not produce permanent improvements to the property. Similarly, the tax treatment of costs incurred for the installation of monitoring systems, wells, or other types of equipment to remediate the contaminated area is not affected by a taxpayer's decision not replace the tank. The costs of constructing or installing the monitoring and remediation facilities must be capitalized even if the tank is not replaced.
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