The Internal Revenue Code is made up of the laws that guide preparation and filing of federal income taxes. The Code includes sections on a wide variety of topics, some of which pertain to the business of farming and the related income and expenses.
The section of the Code includes laws for how to report expenses related to soil and water conservation. Soil and water conservation expenses are the focus of this article.
Soil and Water Conservation Expenses
For farming businesses, you can deduct certain expenses related to conserving soil and water, prevention of erosion, or recovery of endangered species. Expenses that cannot be deducted must instead be capitalized as an increase in the basis of the land. These benefits do not apply for land in a foreign country.
The amount you can deduct for conservation expenses is limited to 25% of the gross income you receive from your farming business. Expenses that you cannot deduct as conservation expenses may still be deductible from your income tax if they are classified as ordinary and necessary expenses. Ordinary and necessary farming expenses include but may not be limited to costs associated with clearly brush from productive land on a periodic basis, interest, costs associated with the regular removal of sediment from drainage ditches, costs paid primarily to produce an agricultural crop that also contribute to the conserving of soil, and taxes.
If you receive income in the form of government payments for approved conservation efforts, you must report the payments as income on your income tax. However, you can exclude certain payments you receive under designated cost-sharing conservation programs.
Qualification of Farming Businesses
To deduct soil and water conservation expenses, you must operate a business that qualifies as a farming business. A farming business is a business that cultivates, managers, or otherwise operates a farm for profit, whether as an owner or a tenant of the farm. A farm operated for pleasure or recreation rather than profit is not considered to be a farming business. In addition, a farming business does not include a business involved exclusively in forestry or the growing of timber.
Farms include orchards, plantations, ranches, and ranges that produce dairy, fish, fruit, livestock, or poultry. Fish farms are areas where fish and other marine animals are grown, raised, fed, and protected. Fish farms do not include locations where fish are merely caught.
If you own a farm and receive rental payments in the form of cash or crop shares, your business is considered to be a farming business. If you receive cash rental payments for a farm you own that is not used for the purpose of producing a farming product, you cannot deduct soil and water conservation expenses. If you receive a fixed payment that is not based on production of the farm, you are in the farming business only if you materially participate in the operation of the farm.
Certification of Conservation Plan
You can deduct expenses related to conserving soil and water only if they occur consistent with a plan approved by the Natural Resources and Conservation Service (NRCS) of the Department of Agriculture. If such a plan does not exist or is not available for your area, soil and water conservation expenses must occur in a manner consistent with a comparable plan approved by a state agency.
There are three types of conservation plans:
- Individual site plans issued individually to farmers who request assistance from the NRCS for the purpose of developing a conservation plan for their farm
- County plans with conservation plans approved for the county where the farm resides
- Comparable state agency plans
Where can I get more help about soil and water conservation expenses?
Help is always available from a tax attorney if you have further questions about soil and water conservation expenses or any other tax questions. A tax attorney will know the tax law and how to make sure you minimize your taxes legally.
You can contact a tax attorney by filling out the form below or calling the telephone number at the top of this page. A tax attorney will then get in touch with you.
Your initial consultation with a tax attorney is always completely free of charge, so get in touch today with someone who can give you the help you need.
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Mark has been a contributor to legal web sites related to bankruptcy, tax, and criminal law since 2011. He has an Accounting degree from Texas A&M University.