What You Need to Know About Conservation Deductions
By Lorraine Walter, Tax Preparer, The Shealy Group
The proper management of farmland plays an important role in preserving and maintaining our natural resources. Managing farmland well helps prevent soil depletion and erosion by ensuring that wind and water don’t strip away the essential moisture and nutrients that make land arable.
To encourage responsible management, the federal government has put in place tax incentives to benefit farmers who invest in projects that help prevent soil erosion – including drainage ditches and other landscaping that promotes responsible water drainage. The incentive of federal tax deductions is spurring many farmers and local governments to spearhead such projects.
Farmers who are eligible for soil and water conservation deductions can benefit financially, with potentially thousands of dollars being funneled back into the operation of the farm. But there are specific criteria that farms and conservation projects need to meet to attain eligibility.
With that in mind, here are some things farmers need to know about conservation deductions.
What is the deduction?
Soil and water tax deductions cannot exceed 25 percent of the farm’s gross income in a given year. If you completed three conservation projects in a calendar year, the total deductions claimed cannot exceed 25 percent of gross income. If the amount is higher, the remaining expenses above 25 percent of gross income can carry over to the next year.
Those who own or rent a farm that has an active agricultural business qualify for the deduction. If you are a landowner renting farmland to someone else, you must have a rental agreement based on production, or if it’s a set-cash rent, you must materially participate in the management of the farm in some way, such as overseeing daily operations or having a hand in key decisions.
Which projects qualify?
The general rule of thumb is, if you’re digging, it’s deductible. If you’re building, it’s probably not. If you’re creating runoff ditches that divert water away from your soil, the project is deductible. If you’re moving earth to alter the topography of your farm for the purposes of diverting runoff, it’s deductible. If you’re constructing anything out of wood, metal or concrete, such as a dam, culvert or well, it’s a capital project and will likely have to be depreciated over the life of the structure.
Do group projects qualify?
Often, conservation projects, such as in a drainage district, involve the land of more than one farmer. If a project covers multiple farms, a tax assessment must be performed on all land in a drainage or conservation district. No individual farmer can deduct more than 10 percent of the total amount of tax assessed to all members of the district. If your amount is more than 10 percent of the total assessed amount for the entire district, the amount over 10 percent is considered a capital expense and must be added to the basis of your farm.
It is well worth the time and effort to develop a thorough understanding of how soil and water conservation deductions can impact you and your farm. And while conservation projects represent a potential financial benefit to your farm, responsible maintenance of our farmland helps ensure its health and productivity so that future generations of farmers can continue to produce America’s food, reducing our reliance on imports.
For more information, read IRS Publication 225 at www.irs.gov.