Farm Bureau: Use Caution When It Comes To Section 180 Deductions

Farmers chasing big tax breaks on farmland purchases could be setting themselves up for trouble with the IRS.  A growing number of promoters are selling so-called residual fertility deductions under Section 180 [one eighty], allowing buyers to write off fertilizer already in the soil.  But the IRS has never formally approved the practice, and its only related guidance denied a claim.  In that denial, the American Farm Burau Federation pointed out the IRS outlined what a taxpayer would need to show:

• That residual fertilizer attributable to the prior owner is present and measurable
• That it is being used up by the crops in the ground
• That the taxpayer holds beneficial ownership of the land.

The financial risk can be steep.  On a 500-acre purchase, an aggressive deduction of $2,000 an acre could mean a million-dollar write-off.  If the IRS rejects it, farmers could owe back taxes, interest, penalties and legal fees.

Potential losses could approach $170,000.

No court decision, regulation or revenue ruling has endorsed the practice.  Agricultural law commentary from Iowa State's Center for Agricultural Law and Taxation and Southern Ag Today describes a narrow, soil test-documented claim as reasonable with respect to approval for submitted deductions, while suggesting that claims based on total nutrient content, long-past purchases, or pasture and rangeland are vulnerable.

The Farm Bureau recommends that farmers insist on independent soil-test documentation and remember: a promoter’s promise of tax savings is no guarantee the IRS will accept the deduction.

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