How to Account for Environmental Remediation Costs

Accounting for environmental remediation

The Internal Revenue Service governs tax laws concerning the method of accounting for all business transactions, including land improvements or repairs such as remediation costs. The method of accounting for environmental remediation costs is entirely dependent on when the contamination occurred in relation to ownership of the property. If the contamination occurred prior to current ownership, then the cost of remediation must be capitalized. If the contamination occurred during the current ownership, then the entire cost can be expensed as incurred.

Things You'll Need

• General ledger
• Cost of remediation

Instructions

Capitalized Cost

1. Create an Environmental Remediation account in the Assets section of the general ledger.

2. Record an increase to the Environmental Remediation account for the entire amount of the cost of the remediation. GAAP (Generally Accepted Accounting Principles) considers an increase to an asset account a "debit."

3. Record a decrease to the Checking/Cash account used to pay for the remediation for the entire amount of the remediation costs. GAAP considers a decrease to a cash/checking account a "credit."

Expensed Cost

1. Create an Environmental Remediation expense account in the Extraordinary expense section of the general ledger. Recording the expense in extraordinary expenses prevents the cost from skewing operating expense numbers on financial statements.

2. Record an increase to the Environment Remediation expense account for the entire cost of the remediation. GAAP considers an increase to an expense account a "debit."

3. Record a decrease to the Checking/Cash account used to pay for the remediation for the entire amount of the remediation costs. GAAP considers a decrease to a cash/checking account a "credit."

Tips & Warnings

• If you are not certain how to properly account for environmental remediation costs, then consider hiring an accounting or tax professional to assist you with your records.

• If the environmental remediation was due to manufacturing, you may have to include the remediation expense as inventory cost. Check the current IRS regulations to determine the proper method for accounting for manufacturing-based environmental remediation costs.

References

• DGS Law: Some Remediation Costs Deductible
• "Principles of Accounting"; A. Douglas Hillman, Richard F. Kochanek, Corine T. Norgaard; 1991