Calvin Trostle, Ph.D., Professor & Extension Agronomist, TAMU Dept. of Soil & Crop Sciences, Lubbock, (806) 746-6101, ctrostle@ag.tamu.edu
Residual (Excess) Soil Fertility Tax Deduction: In order to deduct excess fertilizer on newly purchased or inherited land, what is the best way to compute and document that deduction?
Necessary background: On 2/23/2023 Kansas State University Dept. of Agricultural Economics reprinted as an Extension publication a commentary from a law professor blog published on 2/21/2023. This document and the references therein outline a legal means where residual soil fertily at purchase of farm land may be a depreciable asset for tax purposes. See
https://www.agmanager.info/sites/default/files/pdf/McEowen_ResidualExcessSoilFertility_02-23-23.pdf
What leaps out of this document is the suggestion that residual soil fertility could be valued at up to $4,000 per acre of the purchase price. This raises a red flag. This suggestion of excessive value has no reasonable justifcation, far above any realistic value of residual soil fertility.
All soils have residual fertilty. But it tends to be low. The documents from KSU and the IRS do not well define residual fertility. When I advise a farmer, valuable residual fertility is the level of nutrients above typical background levels. This might be the added amount of residual fertility some farmers seek in a “build and maintain” soil nutrient management plan. Hence elevated residual soil fertility above typical (and often low) soil levels is the benchmark for this discussion.
The basis for this practice, most common in the U.S. Corn Belt, is an obscure Internal Revenue Service document from 1995 (https://www.unclefed.com/SurviveIRS/MSSP/grain.pdf, numbered page 12-1). It states residual soil fertility could be a depreciable asset like a barn or fence. It does emphasize fair market value and documentation of existing soil fertility status on the purchase of property. Otherwise, there are no guidelines on:
- Who would make the estimation of possible residual soil fertilty
- The value of the residual soil fertility
- How the land would be soil sampled (by an independent party?)
- What lab should conduct the analysis
- What the amount of residual soil fertility would be relative to a baseline of nutrients.
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My response is a joint answer from several Texas A&M AgriLife colleagues. Our comments are not about HOW you might get a tax deduction, but the EXTENT this is a viable tax option if residual soil fertilty is assigned a realistic fair-market value. Based on what we read there are flaws in the economics and purported value of residual soil nutrients.
Only one A&M colleague had heard of this possible practice. Soil test lab director Dr. Tony Provin is part of his Illinois family farm. They have used a similar strategy—not on residual soil fertility in purchased farmland, but for depreciation of applied agricultural lime which they apply themselves. (More details below.)
My farmer brother in Coffey Co., Kansas had not heard of this program. He has been a 35-year client of the Kansas Farm Management Association and their farm records management service. KFMA is in the KSU Dept. of Agricultural Economics. None of the professionals he has worked with has ever mentioned this though he has purchased land several times.
The first point is what appears to be the grossly inflated so-called value of residual soil fertility that may be claimed. As noted, the above reprint from KSU suggests up to $4,000 of the actual purchase price could be assigned to residual soil fertily. An Iowa company’s website advertises their grid soil sampling service could be used to identify up to $3,000 in residual soil fertility. No example I have found anywhere actually provides an accounting of how these values were assigned. Why?
Texas A&M AgriLife is highly skeptical if not critical of any suggestion—and lack of documentation—that could possibly value residual soil fertilty at these levels. In my simple opinion as an agronomist trained in soil science these values are grossly inflated. I have not contacted KSU Research & Extension soil scientists and agronomists or Certified Crop Advisors in Kansas for their evaluation of this practice. Readers of the Wheat Farmer/Row Crop Farmer who anticipate land purchases mayb be interested in this possiblity. Contact university agronomic staff or Certified Crop Advisors in your state to address questions about whether the property you would purchase might have residual soil fertilty and how to check for it.
Why may this practice of depreciating residual soil fertilty be more known in the Corn Belt? Farm land values are highest there and the rich soils likely could have higher residual soil fertility than a Kansas or Texas field. But due to excessively high prices paid for land in the Corn Belt, new landowners there might be more desperate to find something to try counter what they paid for the land.
From an agronomic point of view, in my High Plains region of Texas or eastern Kansas and the family farm, I believe it is unlikely the true value of residual soil fertilty—correctly determined— would exceed $200 per acre under the most favorable conditions. Perhaps a Corn Belt soil could have $300 of residual soil fertility. (In the Texas High Plains the rare example of super high residual soil fertility, to the point of injuring crop plants, is from application of dairy and feedlot wastewater and waste solids.)
Should residual soil fertility even qualify as a depreciable asset?
The Internal Revenue Service did suggest in 1995 it could be. In previous writing on soil testing I have advocated individuals who may buy farmland ask permission to soil sample the property. What is its nutrient status? Is there residual soil fertily there like N, P, and K that would save you from purchasing and applying these nutrients? And if so, how much is that worth? Or is the land in need of significant nutrient inputs to bring the productivity up to its potential? These scenarios may reflect what you are willing to pay for the land. This is no different than if you take forage samples of hay you might offer to buy. Forage quality influences the hay value and what you are willing to pay.
A colleague and I do disagree on whether residual soil fertility should even be considered a depreciable asset. I say ‘no’ becuase the fertility is expendable, a consumable asset unlike a fence or machine shed which instead ages and deteriorates with time. Either way might be a buyer’s chioce, and I will defer to others to make that decision.
A Residual Soil Sample Example
A composite soil sample report on property you purchased has a collective total soil N of 75 lbs. of N per acre down to 24” depth that is more N than a typical soil in the area. This includes nitrate-N (readily available, but also leachable), exchangeable N, and N in slowly mineralizable forms like organic matter. The soil also has 25 lbs./A of P2O5 above the highest value of your state Extension’s soil test range for ‘moderate’ P2O5. This is excess residual. (Or some residual fertility is potassium.) How much is this residual N + P worth? The apparent value would be the cost to purchase this amount of N + P to apply. $100 per acre? Based on the example in the above document reprinted by Kansas State, it appears 17-24% of the so-called value of the soil residual fertility could qualify for depreciation. You will also have soil sampling costs though that would need to be done anyway for new farmland.
In contrast to the above example, now imagine what $1,000 of purported residual soil fertility would look like (let alone up to $4,000). For $1,000 the nutrient levels would be so much in excess there is: A) poor or no crop growth due to nutrient toxicity, B) negative excess vegetative growth, and C) environmental pollution from run-off of nitrogen and phosphorus into nearby streams (and for mobile nutrients, leaching into groundwater).
If a farmer wishes to pursue this practice, they must sample the soil before or at land transfer. If I advise on what guidelines be used, I would ask…
- Should soil samples be collected by an independent soil sampler? Should the buyer avoid his or her own direct possession of the soil sample? Must it be analyzed at a state university or other approved lab such as a member of the North American Proficiency Testing consortium?
- Should residual soil nutrient values only be depreciable for the excess if they test in the high/greater range based on state university soil test standards? This reduces/eliminates the question of WHO says and WHAT VALUE is the threshold for residual N.
- Should an independent voice (not the buyer) assign the value of nutrients it would cost to equal the same amount, if purchased?
If a taxpayer can satisfy the IRS guidelines—and have the needed records—the amortization deduction may be allowed. Know the deduction might be far less than a deduction derived from someone’s inflated estimated value of the excess amount.
Dr. Provin notes, outside of feedlots, dairies, and historic vegetable production, average nutrient P is deficient in almost all forage lands, most of the cereal grains, and other lands. Thus, though there would be little to no residual P.
Summary from Texas A&M AgriLife Faculty
We disagree especially in this case with potential grossly inflated estimates of soil residual fertility value. We disagree with programs that deter producers from making sound management decisions. We are not opposed to this deduction—when merited and based on accurate soil test information and realistic economic values.
A note about liming soils to correct for acidic pH. As noted above, Dr. Provin’s family farm uses a depreciation practice when they apply agricultural lime in Illinois. This is a different situation. Lime is not a consumable asset like nitrogen or phosphorus. It is the farmer/landowner’s decision whether to deduct the full cost of the lime in the year it was purchased. This will depend on the farmer’s likely tax status in the year of purchase vs. the next few years. If in the year of lime application projected farm income is lower but may be higher in the future, then depreciation does not make sense. If current-year income is higher than normal, then deduct the full expense income to reduce subsequent higher taxes.
For all the topics in this article, consult the appropriate professional for the necessary advice in your area. This will include university staff and Extension personnel, Certified Crop Advisors, and tax professionals.