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 second in a series of articles focused on soil and water conservation expenses. The previous articles is available here.
Soil and Water Conservation Expenses
You can deduct soil and water conservation expenses only as they relate to land you or your tenant use or have used in the past for farming. Soil and water conservation expenses include but may not be limited to the following:
- Treatment or movement of earth for conditioning, contouring, grading, leveling, and restoring
- Construction, control, and protection of diversion channels, drainage ditches, earthen dams, drainage ditches, and waterways
- Destruction of brush
- Planting of windbreaks
You cannot deduct expenses related to the filling or draining of wetlands as a conversation expense. Likewise, you cannot deduct as a conservation expense preparation of lands for pivot irrigation. These expenses are instead added to the basis of the land.
New Land Used for Farming
If you obtain land that was previously used for farming and you plan to substantially continue using the land for farming, you can deduct soil and water conservation expenses. The ongoing farming activity does not have to be the same type of farming as was conducted by the previous owner. For example, if the previous owner used the land for grazing animals and you plan to convert the land to an orchard, you can deduct soil and water conservation expenses, as both activities qualify as types of farming.
Land Not Used for Farming
If you spend soil and water conservation expenses that affects both land used for farming and land not used for farming, you must allocate the expenses between the two types of land. You can deduct the portion of the expenses allocated to the farmland. You must add the portion of the expenses allocated to the non-farmland to the basis of the land.
Depreciable Assets and Conservation
For any depreciable assets or structures used in soil and water conservation, you typically cannot deduct any expenses. You must capitalize expenses to build, buy, erect, or repair depreciable assets used for conservation. This is typically true when such structures are made from concrete, masonry, metal, tile, and wood. Expenses that must be capitalized include fuel, materials, wages, and supplies, as well as expenses for hauling and moving dirt when installing canals, culverts, dams, pipes, pumps, tanks, reservoirs, and wells. You then recover the investment through annual depreciation.
For nondepreciable assets and structures, you can deduct expenses. Nondepreciable assets and structures are typically those composed solely of earth, such as dams, ponds, and terraces.
You cannot deduct the costs associated with the drilling of a well for use in irrigation or other agricultural purposes. Rather you must capitalize these expenses and depreciate the asset. The basis of a water well should include the costs associated with drilling any test holes.
If you abandon a well that is a dried-up hole, dry hole, or test hole, you can deduct the remaining undepreciated basis in the well as an expense in the year of abandonment. Abandonment occurs when steps are taken to seal off the well such that no further economic benefit can be gained from it.
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.