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-This article is intended for
educational purposes only and does not constitute tax advice.
Recent attention has been given to farmland and ranchland buyers
using Section 180 of the IRS code to depreciate excess fertility
on newly purchased or inherited farms and ranches. This
deduction can provide a material tax benefit for owners of
agricultural land that can help reduce the landowners’ federal
tax burden. There are numerous factors to consider when
exploring whether this deduction may be advantageous in any
specific scenario. This article highlights this important tax
tool and assists farmland and ranchland owners in understanding
how it works. However, this article is intended for educational
purposes only. Please consult your tax and legal advisors before
taking any specific actions.
The Deduction is multi-faceted
Excess or residual fertility deductions stem from nutrient
levels that exceed what is necessary to grow a crop when the
landowner takes title to the property. These standards are
ambiguous and subject to interpretation but are generally
established by researchers and/or institutions. In Illinois, the
University of Illinois Agronomy Handbook is commonly used to
establish baselines for calculating the deductions.
The Buyer Will Need Professional Assistance
To safely navigate these complexities, landowners must hire
certified agronomy and tax professionals to calculate and claim
this deduction. The professionals employed by the land buyer
should stand by the taxpayer in the event of an audit. The
agronomy professionals are typically paid a flat fee per acre or
as a percentage of the tax savings. The cost of hiring a
certified agronomist for their service varies widely, as does
their approach to making excess fertility calculations.
Landowners are encouraged to conduct due diligence on service
providers' methodologies and consider audit track records before
engaging any specific group.
There are Different IRS Sections to Cover Different
Situations
Landowners who meet the IRS standards for actively engaging in
farming/ranching and who purchased or inherited their land in
the current tax year can take advantage of Section 180. However,
other tax code sections allow landowners more passively involved
in agriculture, such as collecting cash rent from tenants and/or
purchasing or inheriting their land in a prior year, to pursue
these deductions. These other sections of the IRS code are
Section 167, Section 168, or Section 611. Suppose a landowner
does not qualify for Section 180 -- they may still want to
consult their tax advisor regarding pursuing an excess nutrient
deduction under these other sections of the tax code. Some
companies assist farmland and ranchland buyers in retroactively
pursuing these deductions using the other three sections of code
as far back as the early 2000s to receive tax deductions, which
equate to tax savings.
Excess P and K are the Most Common Deductions
Section 180 has been in effect for decades but has gained more
attention recently. With increasing costs in fertilizer and
farmland/ranchland purchases, this IRS deduction can make
purchases less burdensome. Technology has improved the
quantification of fertility data. Phosphorus (P) and Potassium
(K) are the primary nutrients used to calculate an existing
depreciation deduction. However, all the agriculturally
necessary nutrients, including micronutrients such as boron,
sulfur, and manganese, can also be included. Certified
agronomists differ in their calculations, reinforcing the need
for landowners to conduct thorough due diligence when selecting
a service provider to perform this analysis.
Soil and production properties and practices, such as organic
matter content, fertilizer application history, and crop
rotations, determine the soil’s excess value. Nitrogen (N) is
added to the soil every year and is not residual, so an excess
of N is not likely to exist. Naturally occurring elements are
not deductible. Most elements are deductible as excess fertility
in the soil's top six to seven inches, the standard depth from
which soil samples are taken.
Test Soil Immediately and
Before Fertilizer is Applied
Before applying fertilizer to recently purchased farmland or
ranchland, the owner must complete a soil test soon after the
land acquisition to utilize Section 180. The new owner must
actively use the land for farming or ranching purposes. Raw land
that is sitting idle does not count. Land covered by
conservation easements that allow agricultural production can
benefit from this deduction. Land in the crop CRP (Conservation
Reserve Program) cannot utilize Section 180.
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Professional soil testing accomplishes
the evidence requirement to prove excess residual fertility. After
completing a soil test, a certified professional agronomist is used
to verify the excess fertility calculations. Notify and discuss
claiming the deduction with your tax professional before soil
testing and hiring an accredited agronomist. The landowner may want
to interview several certified agronomists offering this service.
Discuss the findings with your tax professional before choosing the
agronomist.
The taxpayer can use the Section 180 deductions during the first
year following the farmland or ranchland purchase. The IRS may allow
the amortization of fertilizer costs based on the percentage of use
or benefit each year. The land buyer does not have to take the
entire deduction in the first year. The deduction can be used over
three or four years. Your tax advisor can guide you in spreading the
deduction. A 60%/30%/10% schedule is sometimes used to deplete
excess nutrients over three years. The first year would see a 60%
deduction of excess nutrients in the first year, 30% in the 2nd
year, and 10% in the 3rd and final year.
The certified agronomist will create a report based on soil tests.
The report will include a comprehensive soil test analysis showing
nutrient levels compared to industry standards (University of
Illinois recommended fertility levels in Illinois). An economic
value estimate of the excess nutrients is used to create the
nutrient level report. The agronomist will recommend an amortization
period based on how long the residual fertility will provide needed
nutrients to the growing crop.
The IRS can deny the tax deduction for excess fertilizer supply
unless the taxpayer can prove beneficial (controlling) ownership of
the excess fertilizer supply held by the farm or ranch's soil. Soil
testing documents the levels of excess nutrients for IRS purposes. A
further requirement is that the growing crop fully utilizes the
excess nutrients. The IRS monitors the use of Section 180 to
determine whether the values assigned to depreciable farm or ranch
excess fertility are reasonable. Consult your tax advisor before
deciding on this tax code utilization for your farm. Deducting
excess fertility could result in a higher tax obligation in the
future if the farmland is sold.
Credits: Ag Soil Management, Bo Safra Ag LLC, KSI Laboratories, and
United Soils, Inc.
About Extension
University of Illinois Extension develops educational programs,
extends knowledge, and builds partnerships to support people,
communities, and their environments as part of the state's
land-grant institution. Extension serves as the leading public
outreach effort for University of Illinois Urbana-Champaign and the
College of Agricultural, Consumer and Environmental Sciences in all
102 Illinois counties through a network of 27 multi-county units and
over 700 staff statewide. Extension’s mission is responsive to eight
strategic priorities — community, economy, environment, food and
agriculture, health, partnerships, technology and discovery, and
workforce excellence — that are served through six program areas —
4-H youth development, agriculture and agribusiness, community and
economic development, family and consumer science, integrated health
disparities, and natural resources, environment, and energy.
COLLEGE OF AGRICULTURAL, CONSUMER & ENVIRONMENTAL SCIENCES
University of Illinois | U.S. Department of Agriculture | Local
Extension Councils Cooperating University of Illinois Extension
provides equal opportunities in programs and employment. If you need
a reasonable accommodation to attend, call the registration office.
Issued in furtherance of Cooperative Extension work, Acts of May 8,
and June 30, 1914, in cooperation with the US Department of
Agriculture by the Director, Cooperative Extension Service, and
University of Illinois.
[Jill Meints
Commercial Agriculture – Special Projects Assistant]
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