Legacy Nutrient Deductions

Last week, Legacy Nutrient Tax Deductions (LNTD) were discussed and this is a follow up. This is a 1960’s tax deduction for oil, gas, mining, agriculture, and even timber production. It allows farmers to deduct the “excess value” of soil nutrients as a depreciating asset. For 60 years this deduction was ignored but now the IRS has finally come up with tax rules for this deduction. This article will explore how some farmers using this deduction. Consult with your attorney and CPA whether you want to pursue this deduction.

Here are some common problems farmers have had with this tax deduction. First, many were taking deductions too quickly or excessively. Improper sampling (mixed depths, inconsistent grids) are an issue. It is easy to double count current owner tenant inputs. Bad baselines will inflate “excess” nutrient values. Thin documentation, i.e. can’t satisfy PLR MSSP guidance for tax purposes.

The biggest problem most farmers who are looking into this deduction was how to document the “excess value” of soil nutrients. Since this tax deduction was mainly focused on the mineral and gas reserves, agriculture and timber were added in. Frankly, it is not a logical deduction. From a water quality and even soil fertility standpoint, excess soil nutrients can be a liability. Farmers will find that the calculations and measurements are difficult to take and document. A standard soil test is inadequate. So many frustrated farmers gave up trying to take this deduction.

For example, a farmer could sample the most fertile fields or even a manure pile to rack up “excess nutrients.” To avoid that problem, third party sampling and soil testing allows independent results. Third party companies grid soil sample a farm every 5 to 10 acres, do the measurements needed, and do the calculations for around $40 per acre. They send you a report with the numbers the CPA needs to file your taxes. Since it is an independent company generating the report, they are liable for the numbers they generate.

As a review, IRS Code Sections 167, 168, 180, and 611 are applicable for this deduction. Not all farms benefit the same. Farms with the highest fertility, either natural or artificially enhanced by fertilizer or manure, will have the highest excess nutrient values which can be deducted. Livestock farms generally have more excess nutrients than regular cropland.

Here is a simple made up example for simple math. The independent company samples your fields on 5 or 10 acre grids. Usually, farmers put the most stock for fertility purposes in the nitrogen (N), phosphorus (P), and potassium (K) values for optimal growth. For excess nutrient value, that does not apply. The calcium value is the highest (5000 pounds at $0.16 per pound) at $800, followed by K (600 pounds at $0.40) at $240, P (165 pounds at $0.60) at $101, magnesium (600 pounds at $0.13) at $78, nitrogen (70 pounds at $0.60) at $42, and finally sulfur (20 pounds at $0.50) at $10 per acre for this grid. The total value of macro nutrients is $1,271.

Then the micro nutrients are added in. Iron (200 pounds at $1.50) at $300, cobalt (20 pounds at $2.00) at $40, manganese (15 pounds at $0.80) at $12, copper (3 pounds at $4.00) at $12, zinc at $4, molybdenum at $2, and boron at $1 for $371 total in micro nutrients. The total value of nutrients that can be deducted is $1,271 for macros and $371 for micros for a total of $1,642 for your baseline LNTD.

For IRS Section 167 and a 7 year deduction, that is $1,642 divided by 7 years for a $234 deduction per acre per year for 7 years. On an 80 acre field that is $18,720. The one time cost to sample is $40 per acre for 80 acres or $3,200. This is a one time deduction that farmers take for land that they inherited, transferred, or purchased.

Depending upon the tax code, nutrient deductions can be classified as either active losses or passive losses. Active losses offset active income for landowners who actively participate in agricultural production. These losses can be used to shelter active income in farming, but if there is another side business in construction with a profit, they can also use the farmland loss deduction to shield the construction business income. For passive income, such as a landowner who does not materially participate in the farming business and just collects rent, they can take the nutrient loss deduction to shelter some of their passive income. Passive income and loss rules are more difficult and it is possible only a portion of the nutrient loss can be taken.

As a reminder, this LNTD does lower your basis on your agricultural cropland including timber. The timber rules are to be available March, 2026. This LNTD may not be for everyone, but numerous farmers are actively pursuing and using it.