Legacy Nutrient Tax Reductions

Everyone is required to pay taxes but no more than the law requires. Farmers have many assets which may depreciated to lower taxes. Congress has given a few businesses including oil, mining, and even agriculture ways to depreciate assets that are consumed. For example, back in the 1960’s; Congress allowed oil and mining companies to depreciate the value of their investment in oil and minerals. Included in that legislation was the same deductions for agriculture and timber. For 60+ years, those federal tax deductions have been ignored but now tax rules have been written to allow farmers to deduction the nutrient or fertilizer value of their cropland and even timber, as a tax deduction.

Barry Ward, OSU Farm Management Economist discussed this recently at a farm meeting. While CPA’s and lawyers have a right to be skeptical, they can sort it out by reading the tax laws (more on that coming). The federal tax deduction write off discovery occurred about 5 years ago. A Brazilian farmer/business came to the USA and he was using a national tax deductions in his country. When he investigated USA tax law, he found similar legislation but no tax guidelines on how to do it legally. He pursued the matter with the IRS and they developed some rules and guidelines based on similar activity in the oil and mining industry. As of today, about 4,000 farms in 50 states have taken legacy nutrient tax deductions (LNTD) for the nutrient status of their soil. Average total value to be deducted is around $1400 to $1700 per acre.

Here are some rules: To qualify for deductions, a landowner must have purchased or inherited land since the early 2000’s. The land has to be used for crop, livestock or timber production. The land needs a minimum investment of $500 per acre. Some land purchased before the 1970’s may not meet that minimum investment. The hard part for most farmers is getting the nutrient status of their farmland verified. The calculations and methods do not easily lend themselves to common soil test. This is the step that causes farmers the most problem.

Switching gears, the first step is to talk to your CPA or lawyer. So here are the four IRS tax sections that qualify for this deduction. Section 180 of the IRS code for active farmers and ranchers. Farmers must have purchased, exchanged, or inherited agricultural land within the last 15 years. For land purchased within the last year, file year-end return. Land purchased between 1 and 3 years, file an amended return and for land between 3 and 15 years, file Form 3115.

Section 18 says that a taxpayer engaged in the business of farming may elect to expense “fertilizer, lime, ground limestone, marl, or other material to enrich, neutralize, or condition land used for farming.” Section 18 allows farmers to expense their nutrients in the year of purchase of land. Section 18 does not specify where the nutrients are purchased; usually a fertilizer dealer but it can also be from legacy soil nutrients. This is the tax loophole that allows farmers to use LNTD.

IRS Section 611 for Depletion Deductions for landowners. Must have purchased, exchanged, or inherited agricultural land within the last 15 years. Allows farmers to deduct costs for natural resource depletion. Uses two methods for deductions: cost depletion or percentage depletion. Section 611 includes deductions for timber but the IRS rules are still being written with release expected by March 2026. Active farmers as well as landowners who passively collect rent or income on agricultural land qualify.

IRS Section 167 Depreciation Deduction for landowners. Same requirement; purchased, exchanged, or inherited agricultural land within last 15 years. Farmers can deduct depreciation of business / income-producing property for tangible & intangible assets. IRS Section 168: ACRS and MACRS for landowners. Purchased, exchanged, or inherited land within last 15 years. Can deduct depreciation of business / income-producing property again for tangible & intangible assets. These are simple summaries, so consult your CPA.

A couple of notes. First, famers have to be making money to use the deductions. Crop farmers are hurting but many livestock farmers especially cattle, dairy, poultry, and even swine producers may be able to use the federal tax deductions. The IRS tax deductions do lower your tax basis on your agricultural cropland (including timber). Amortization periods can vary because the IRS does not prescribe a useful life to legacy soil nutrients like they do other depreciable assets. Farmers in all 50 USA states are using this tax deduction. As a follow up, the next article will give some tax deduction examples and how to legally accomplish it.