Common Questions About the Residual Fertility Deduction
Key Takeaways:
- Residual fertility deductions may apply to recent land purchases, inherited property and land acquired in prior years.
- Strong records and soil testing are key to determining available nutrients, their value and whether the deduction makes sense.
- Working with an experienced CPA and agronomist can help landowners evaluate eligibility and support the deduction with proper documentation.
Answers to common questions about Section 180 and whether an analysis is worth pursuing
The residual fertility deduction (commonly referred to as Section 180) has been around for years, but the popularity and value of the deduction has increased recently. Part of the reason for that is the value of minerals and nutrients have increased, but technology has also advanced, allowing agronomists to have a better idea of what’s in the soil.
The residual fertility deduction on current year land purchases is the most common time to use it, but a common question we get is “Can the residual fertility deduction be used on land that was inherited?” The heir will receive a step up in basis to the lands value at date of death and commonly an appraisal is done to substantiate that value. We also consider having an agronomist collect soil samples and analyze soil fertility in this situation to determine if part of the basis needs allocated to fertility and used as a deduction.
Another question we get is “What about land purchased in a prior year?” With good records it’s possible to work backwards to the nutrients available in the past and the corresponding value. We contract with agronomists experienced with the residual fertility deduction and going back to a purchase or inheritance date in the past. The big key to this and all parts of this deduction is good documentation.
Once the prior question is answered its quickly followed up with “How far back is too far?” We do not have any specific guidance related to how far back you can go. In our experience, once you get around 10 to 15 years in the past the value of the deduction starts to drop and the ability to provide records becomes more difficult.
A common situation in farming often leads to the question “If I rented the land for years and applied fertilizer, but then purchase the land, can I still use the residual fertility deduction?” This does not necessarily mean you cannot use the deduction. We would want to review the input records from the last few years and work with the agronomist to determine if any recapture is necessary.
“Does pasture qualify or is this deduction just for farm ground?” In certain circumstances we do take this deduction on pasture. We look at each parcel of land and how it’s being used in the operation. We consult with an agronomist that has experience testing pasture ground and determine if it makes sense to do.
Questions?
Consulting with a CPA and agronomist that has experience with this deduction and the documentation needed is key. Adams Brown can walk you through the tax side of things and works with agronomists who have valued thousands of acres of farm ground around the country. Contact Adams Brown agriculture team today!
