As part of their overall investment strategies, landowners have a wide variety of tools available at their disposal to maximize returns. Some tools, such as the 1031 exchange, are fairly well-known and widely discussed. However, there are other options for landowners to safeguard the value of their land. One such tool gaining popularity among farmland owners and buyers is the IRS Section 180 of the tax code, which allows landowners to claim depreciation on depreciable assets associated with their farmland purchase.
This article will explore the function of this section of the tax code as well as the ways that it can benefit landowners!
What is IRS Tax Code 180?
As stated above, Section 180 of the IRS tax code allows depreciable assets to be claimed as depreciation which is then deductible from the total purchase. During his recent appearance on the National Land Podcast, Owner of Agricultural Soil Management Alec Bean elaborated on the functionality of tax code 180, stating, “[IRS Section 180] allows a taxpayer engaged in the trade or business of farming to deduct expenses on the farm. Primarily this is in relation to fertilizer, lime, potash, and other materials. So this goes hand in hand with the depreciation of other farm assets like tile lines, buildings, fences, irrigation equipment, etc…”
Given the difficulty in finding opportunities for deductions in farmland purchases, tax code 180 provides a unique opportunity for farmland buyers. Speaking to the power of this tool for farmland buyers, Bean stated, “This is a piece of the tax code that every rural land buyer, specifically farmland buyers, should be looking into because it can potentially save thousands of dollars in taxes and offer something that is a depreciable asset to an asset class that just doesn’t generally have a lot of depreciable qualities to it.”
What is Residual Soil Fertility?
One of the main ways that farmland owners could use tax code 180 is to claim depreciation on residual soil fertility as well as the expense of the fertilizer. Residual soil fertility refers to the nutrient levels in the soil and the overall quality of the soil following crop harvest. Residual fertility is important as it directly impacts a farmland owner’s ability to sustain productive crop cycles from year to year.
If levels of nutrients in the soil are found to be in excess of the state’s optimal crop nutrition values, then that residual soil fertility would be considered excess soil fertility and so the land becomes a depreciable asset.
How is Excess Soil Fertility Determined?
To determine residual or excess soil fertility, Bean explains that the first step is conducting a soil test on the newly purchased property to establish existing nutrient levels. He went on to explain, “A client purchases a piece of land, and a soil test is taken just like normal to determine nutrient levels. Those nutrient levels from the soil tests are then compared to what the state’s land grant university says is optimal for crop production. So in my case, I’m in Illinois so I use the University of Illinois optimal crop production values to determine these numbers.” The results from the soil test are then compared against the state’s optimal nutrition values to determine any residual fertility as well as any excess that would qualify for a deduction.
Bean went on to explain that there are two important things to remember when determining excess soil fertility. The first is to have the soil test conducted as soon as possible after the purchase is made.
The second is to ensure that no fertilizer is applied to the soil between the time of the purchase and the soil test. Applying fertilizer before a soil test prevents a landowner from claiming depreciation on excess soil fertility since the property’s baseline cannot be accurately compared against the state’s optimal nutrition levels.
This is especially important to keep in mind for landowners with tenant farmers since they may be unaware of the landowner’s goal for the property and could unintentionally ruin their chance at a deduction by spreading fertilizer before a soil test has been conducted.
How Can Section 180 Save Landowners Money?
After comparing the results of the soil test to the state’s optimal nutrition levels and determining the presence of excess soil fertility, the landowner is presented with the findings. At this point, the landowner may have their soil testing company produce a report that specifies the amount of excess soil fertility present per acre on the property and the monetary value associated with that excess fertility.
They may then take this report to their CPA, or Certified Public Accountant, to be applied to their annual return. By taking the time to find excess soil fertility and utilizing IRS tax code 180, landowners can potentially save themselves thousands of dollars on their farmland purchases.