May 1, 2023

Tax Talks

The Tax Code and Residual Soil Fertility

By: Dario Arezzo


Recently, an old tax concept began to resurface. Farmers are asking whether they can write off residual fertilizer in the purchase of farmland. Of course, there isn’t a strong incentive for landowners to apply more fertilizer than is needed, given the increasingly high costs of doing so. However, there are cases where farmers are purchasing land with residual soil fertility.

As most farmers realize, the purchase of farmland is nondeductible and thus finding deductions during the purchase of farmland can be beneficial to help cash flow the purchase.

What does the tax code say? Well, the section dealing with the topic, which is quite short, permits farmers to elect to treat as an expense the amounts paid or incurred for the purchase or acquisition of fertilizer, lime, ground limestone, marl or other materials to “ensure, neutralize or condition land” used in farming, or for the application of those materials to the land. Importantly, expenditures for the initial preparation of land that was never previously used in farming are not eligible for this provision. If the costs are not expensed, they are then capitalized and amortized over its useful life.

Regarding amortization of residual soil fertility, the IRS responded to a taxpayer-specific situation in the early 1990s and outlined the ways in which a taxpayer might be successful in amortizing the amounts for residual soil fertility.

The taxpayer must:

  • Establish the presence and extent of the fertilizer
  • Measure the level of soil fertility attributable to fertilizer applied to the land by the previous owner
  • Provide a basis to measure the increase in the level of fertility in the land
  • Provide evidence that the residual fertilizer supply is actually being exhausted

Regardless of whether farmers are attempting to deduct or amortize residual soil fertility, the important point to keep in mind is that they as the taxpayer are responsible for proving that there is in fact residual soil fertility and its fair market value. Even in that case, the IRS could still challenge the values with its own agronomists and experts, similar to challenging the amount of a business valuation in transfer situations.

One way a taxpayer could document the value of the residual soil fertility would be including it on the purchase contract for farmland. Farmers pay a premium for land with residual fertility and working with an agronomist to provide sound reports in quantifying these amounts is probably a must do to be successful here.

Like many things in the tax code, conceptually the idea of deducting or amortizing residual soil fertility is permitted. However, the difficulty is ensuring all the proper procedures and documentations requirements are met so the taxpayer can be put in the best position possible to defend the deductions if audited.


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Tags: tax planning, taxes, expenses

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