Over the last few years, there has been much excitement about deducting excess soil fertility when purchasing new farmland. I’ve consulted with hundreds of farmers and land buyers to help them both navigate this area of the tax code and save thousands or in some cases, hundreds of thousands of dollars in tax liability. Here are 3 things to keep in mind when considering the Section 180 deduction.
This is the technical side of section 180, I’ll break this down in the next paragraph.
Section 180 of the Internal Revenue Code states that “(a) in general a taxpayer engaged in the business of farming may elect to treat as expenses which are not chargeable to capital account expenditures (otherwise chargeable to capital account) which are paid or incurred by him during the taxable year for the purchase or acquisition of fertilizer, lime, ground limestone, marl, or other materials to enrich, neutralize, or condition land used in farming, or for the application of such materials to such land. The expenditures shall be allowed as a deduction”
When you buy a piece of farmland, the IRS allows for the deduction or depreciation of certain assets that are part of the farm such as buildings, tile lines, fences etc. It is acceptable to deduct fertility that can be proven to be above what is needed for optimal crop yields. When fertility levels are higher than optimal, one could view this as an asset to the land much like a tile line or fence. In the most simplistic definition, it is a deduction for the amount and cost of the fertility of land caused by prior fertilization, fertility enhancements, etc. that exists at the time of the purchase of the land by an individual engaged in the business of farming and/or other agricultural pursuits as allowed by the Internal Revenue Code.
Here are three boxes that my firm ASM helps our clients check when electing to take this deduction.
- The client can establish beneficial ownership of the residual fertilizer supply.
This is a matter of who purchased the land, is that entity involved in “the business of farming and/or other agricultural pursuits? We work closely with our client’s tax advisers to establish and confirm client eligibility.
- Can establish the presence and extent of the residual fertilizer.
ASM utilizes either client provided, professional soil tests or coordinates sampling and soil testing efforts in accordance with university standard operating procedures. We utilize the services of top agronomic soil testing laboratories in the US. After receiving soil test results, ASM advisers compare soil test results to Land Grant University standards for soil fertility and establish an excess nutrient load in the soil.
- Can establish the residual fertilizer supply is actually being exhausted.
ASM advisers utilize university data & yields to map out a nutrient exhaustion period of the excess fertility. This further confirms that crop yields are drawing down excess fertility and provides a frame work for accounts to deduct over a period of time.
These are just three of the many considerations to keep in mind when considering utilizing this deduction, Please keep in mind this is not legal, financial or tax advice, please seek counsel from a professional in these fields to see if ASM’s services are a fit for your specific situation.
