“This is something I’ve been talking about since 1992, but all of the sudden in the past five years, people thought it came out of nowhere,” says Roger McEowen, professor at Washburn University School of Law.
McEowen is referring to the residual soil fertility deduction, which the IRS provided comments—while not official guidance—on how landowners can deduct the value of excess soil fertility applied on recently acquired land.
“With the run up in land values, there is a lot more interest than six years ago. This isn’t new, but it’s like pouring gas on a fire,” McEowen says.
When purchasing farmland, a portion of the purchase price can often be attributed to “residual fertility"—nutrients already present in the soil from the previous owner’s applications that exceed the base levels.
CropQuest, a soil testing business based in Kansas, has been doing reports for this tax deduction since 2020.
“It probably doubles every year or more,” says Nathan Woydziak, precision ag manager at CropQuest. “Today, we’re doing this testing for hundreds of farmers across our service area.”
Who Qualifies for the Deduction?
Only the owner of the farmland (or pastureland) qualifies for the deduction, and the land must be used for agricultural production. Second, the land needs to have been purchased or transferred with stepped-up basis recently.
What Drives The Value of the Deduction?
“The big driving force is time of purchase,” says Adam Brenneman, a sales representative at Boa Safra Ag, which produces the required soil fertility reports. Boa Safra advises landowners consider any acquisitions since 2010.
“We won’t survey properties older than 2010,” Brenneman says. “For example, our averages for properties are around $1,000 to $1,700 an acre for the value of the deduction, but if it’s acquired in 2005 would be around $300 an acre, 2000 gets closer to $150 per acre.”
In this process, it’s the market value of nutrients multiplied by your excess.
“The deduction based on your excess nutrient load in the property since time of purchase. When you bought the property, you bought the structure and geographic space, you also bought the 8” zone in the soil of where agriculture takes place. The nutrients in that zone, any of them, above baseline are able to be part of the deduction process,” Brenneman says.
What’s Required to Document the Deduction?
Farmers should maintain detailed records, including the purchase agreement, soil test results, and the methodology used to calculate the dollar value of the nutrients.
For the soil test, this includes macro and micronutrients. For example, the CropQuest and Boa Safra reports detail 11 soil nutrients.
“Good documentation is key. We’ve done some where we went back in history on those fields but regularly we go back 5 years. And your accountant has to be on board,” Woydziak says.
To claim this deduction, you must prove that the nutrient levels are “excessive” compared to a standard baseline.
How is the Deduction Filed?
If land is in a trust, S corp or LLC, the deduction applies to the ownership of the property. And it’s up to the accountant to determine the schedule of the depreciation, which is commonly applied across three to seven years.
“There is no code section. The only guidance we have is the scant things IRS said 34 years ago,” McEowen says. “Have the soil analysis done as close to the time of acquisition as possible. That’s the most bullet proof thing if the IRS challenges it with an audit.”
McEowen says some tax professionals will not include these deductions because of the lack of clarity from the IRS.
“We aren’t sure if it’s depreciation, depletion, or amortization. I think it’s depletion. It’s a natural resource like oil and gas. Fertility gets mined over time. So the theory is you are entitled to the deduction in the nutrient deposit in that soil. So most tax professionals just massage this in as depreciation. And some will put it in section 180 and then separately track it. I don’t know if it’s the wrong or right approach. But that’s as good as we can do.”
Brenneman emphasizes this is a process that requires a team of professionals.
“We don’t do tax advice. We work in the dirt,” he says. “Our audit rate is less than 2%. We stand behind our reports within your auditable years. And we have a 100% success rate.” Brenneman says.
McEowen adds, “I foresee a statute from Congress and IRS writing rules to carrying out the statute. It could be in the reconciliation bill or the skinny farm bill. That’s the approach I think is going to happen. We need a statute.”