By Andi Anderson
Residual fertility deductions have become a frequent topic among farmers purchasing new farmland. Traditionally, these deductions were used to account for unexhausted fertilizer left in the soil from previous ownership.
Today, however, some taxpayers are claiming large deductions based on the full nutrient content of soil, raising concerns about the legal foundation and long-term risks of such practices.
The background begins with fertilizer deductions under Section 180. Before 1960, farmers had to spread fertilizer deductions over several years because fertilizer remained useful beyond one growing season.
Recognizing the challenges this created, Congress passed Section 180, allowing farmers to deduct fertilizer, lime and similar materials in the year they are applied.
When purchasing land, farmers often allocate parts of the purchase price to assets such as fences or drainage systems. Some also assign value to unexhausted fertilizer. Although this practice is not directly confirmed in law, a 1991 IRS memo outlined requirements for potentially supporting such deductions.
The farmer must prove that the fertilizer came from the prior owner, that it is being used up and that it is inseparable from land the buyer owns.
If these conditions are met, a buyer may be able to deduct the value of unexhausted fertilizer using Section 180. But this applies only to fertilizer previously added to enrich the soil—not to general soil nutrients.
In recent years, some land purchasers have attempted to claim exceptionally large deductions based on total soil nutrient levels. Courts have consistently ruled that soil itself is not depreciable and nutrient loss cannot be deducted through depletion. Section 180 only covers fertilizer that was applied intentionally.
Large or unrealistic claims may trigger IRS audits, penalties or denial of deductions. Claims linked to pastureland, old land purchases or natural soil conditions are especially risky.
Until clearer guidance arrives from Congress or the IRS, farmers should consult tax professionals and carefully evaluate the risks before asserting residual fertility deductions.
Photo Credit: gettyimages-zoran-zeremski
Categories: National