A John Deere Publication

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Landowners who have recently bought farmland may qualify for a deduction on the land's existing fertilizer base by using the Internal Revenue Service Section 180. Consulting an accountant is a good first step.

Agriculture, Farm Operation September 01, 2024

A Hot Deduction on New Land

Residual fertilizer cuts costs of farmland purchases.

by Bill Spiegel

A tax deduction landowners can use on just-purchased land may slash the cost of that property.

The Internal Revenue Service Section 180 code says landowners of newly acquired land may treat residual fertility present in the soil at the time of purchase as a deductible expense. Simply: people who buy farmland can deduct the value of existing fertilizer in that land, says Bryce Irlbeck, co-founder of Boa Safra Ag, an Iowa firm that specializes in helping farmers find "hidden" tax deductions.

"Soil holds a lot of fertility, which gives land value," he says.

The land buyer needs to have soil tests done on the newly acquired land in the same calendar year the land is purchased. A third party must determine the amount of excess fertilizer compared to a baseline for that land.

"The baseline can be set in numerous ways, but we focus on looking at the nutrient levels in an acre that the crop cannot readily access," says Tyler Bruch, co-founder and CEO of Boa Safra. "We then analyze the soils in multiple profiles to compare what is plant available, and therefore depletable or depreciable, against those baseline levels."

The Section 180 rules are nebulous. Shannon Sand, ag economist at the University of Nebraska's North Platte Extension office, says landowners should file for Section 180 in the year the land is purchased. That's the simplest way to apply the rule, as landowners can file before fertilizer is added to that farm.

If land was purchased within the last three years, the IRS allows taxpayers to amend taxes up to three years from the original filing date.

Irlbeck says Boa Safra can recover Section 180 on land bought since 2010. Prior to 2010, the value proposition decreases, as land prices had not yet soared, and crop and fertilizer prices were lower than they are today.

Above. Bryce Irlbeck, co-founder of Boa Safra Ag, says the Iowa-based company has helped landowners in 40 states use IRS Section 180. The company's suite of services includes agronomy, legal analysis, and accountants.

Determining value. At Boa Safra, a team of experts collaborates on the Section 180 process. An agronomist obtains soil samples from the purchased land, and compares these values to a baseline fertility. Typically, nutrients included in the value determination include nitrogen, phosphorus, and potassium, with samples taken in either zone or grid fashion. Then, the group's accounting team determines the value of the excess fertilizer, and how much of a deduction the buyer may qualify for.

A host of firms help landowners cash in on Section 180. Prices typically range from $20-40 per acre, depending upon the array of services selected.

"Almost all of our clients see a financial reward substantially more than the costs associated with our service, which is why we see so many repeat customers and introductions from our past clients," Bruch says.

Landon Oldham, founder and CEO of Heartland Soil Services, has provided information for dozens of Section 180 deductions. He suggests landowners grid sample that property for the agronomic information—not to chase the tax deduction.

"Then, you know what the average nutrient value is, but you go into the sale with more information," he says.

Rules to know. Sand says there are several questions farmers need to answer before they use the Section 180 rule. If land is sold at a premium, there is a good bet there is additional fertility on that land, so that might be a good fit. Well-managed farms with higher quality soils tend to provide the highest return on Section 180.

Also, she suggests landowners carefully think about the expense they may have in soil testing, soil test results and analysis, plus accounting fees.

Farmers who use the Section 180 deduction will lose the tax basis in the land purchased, equal to the tax deduction, which comes into play if land is sold. However, if that land will be transferred from one generation to the next at the time of death, that loss of basis may not be a concern as stepped-up basis occurs at death.

If a landowner rented the land prior to buying it, they are ineligible for Section 180, Sand adds.

"If you think you qualify, talk to your accountant and an agronomist," she says. ‡