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EXPENSES
Rev. Rul. 2004-18 addressed the treatment of environmental cleanup costs related to Sec. 263A and capitalization of those costs into inventory. Specifically, it analyzed the remediation costs incurred by a manufacturer that continues to use contaminated property in its operations.
Under Sec. 263A, a taxpayer has to capitalize all direct and certain indirect costs properly allocable to the production of real or tangible personal property. In Rev. Rul. 2004-18, the taxpayer incurred costs currently for soil and groundwater remediation for contamination from hazardous waste disposal in prior years. The IRS concluded that the costs incurred for environmental cleanup were indirectly related to the taxpayers production activities and had to be capitalized into inventory under Sec. 263A.
Background
Rev. Rul. 94-38 used to be considered the general authority on how to treat environmental remediation costs. In that ruling, the IRS determined that costs incurred to clean up contaminated land and to treat groundwater were not capitalizable, because they did...