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. This is the third in a series of articles focused on soil and water conservation expenses. The previous articles are available here: Part 1 and Part 2.
Conservation District Assessments
In some communities, a soil or water conservation district may, to offset the expenses incurred by the district, levy an assessment against farmers who benefit from the district’s conservation efforts. You can deduct expenses related to the assessment when either of the following are true:
- The expenses are ones you could have deducted if you had paid them directly, or
- The expenses are ones related to depreciable property used in the business of the district.
Depreciable Property Assessments
You can typically deduct expenses related to conservation efforts or assessments that cover expenses for depreciable property. These expense include costs for concrete structures, draglines, locks, pumps, and similar equipment. The depreciable property must be used in the conservation activities of the district.
The deduction of these assessment expenses is subject to a total assessment limit and a yearly assessment limit. Once you apply these limits, you can add the remaining deductible amount to your other conservation expenses incurred during the year. The total of all conservation expenses is limited to 25% of gross income from farming for the year.
Total Assessment Limit
You cannot deduct more than 10% of the total amount assessed by the district to members of the district for the depreciable property. This limitation applies whether the payments are made as a one-time payment or in installments. If your assessment is more than 10% of the total amount, both of the following apply:
- The amount above 10% is considered a capital expenses and must be added to the basis of your land, and
- When installment payments are made, each payment must be prorated between conservation expense and capital expense.
Yearly Assessment Limit
The maximum amount you can deduct in a single tax year is the total of 10% of your deductible share plus $500. If the amount you pay is equal to or less than the maximum amount, you can deduct the total in the year it is incurred. If the amount you paid is more than the maximum amount, you can deduct only 10% of your deductible shared of the cost. You can deduct the remainder in equal proration over the following nine tax years. Your total conservation expense deduction for each year is limited to no more than 25% of gross income from farming.
Disposal of Land During Nine-Year Period
If you dispose of the land during the nine-year period when you are deducting conservation expenses subject to the yearly limit, any amount you have not yet deducted because of the deduction limit are added to the basis of the property.
Death of Farmer During Nine-Year Period
If a farmer dies during the nine-year period, any remaining conservation expenses subject to the yearly limit that have not yet been deducted are deducted in the year of death.
25% Limit on Deduction
The total deduction for conservation expenses in any tax year is limited to 25% of your gross income from farming.
Your gross income from farming is the income you derive in the business of farming related to the production of crops, fish, fruits, livestock, or other agricultural products. Any gain from the sale of breeding, dairy, or draft animals are included in gross income. Any gain from the sale of farming assets such as machinery or land are not included in gross income.
If your deductible conservation expenses exceed 25% of your gross farming income in any year, you can carry over the unused portion to future tax years. However, the 25% limit on deductions will apply in those tax years as well.
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.