A Look at IRS Section 180 Tax Deductions 

By Cameron Castillo

Key Takeaways:

• Section 180 tax deductions allow farmers and ranchers to deduct costs associated with the purchase, acquisition or application of critical inputs such as fertilizer and minerals in the year paid.

• For years, companies have advertised opportunities for farmers and ranchers to submit Section 180 deductions on the value of residual fertilizer and minerals in newly acquired farm or pastureland.

• While “residual fertility” deduction claims carry the allure of substantial per-acre savings, these claims are not backed by sound IRS guidance and could result in significant penalties for farmers and ranchers claiming these deductions.

Farmers buying land have long been able to take a tax deduction on the fertilizer they apply. However, a more aggressive idea has spread quickly over the past few years: claiming deductions on the fertilizer that was already in the soil when the land changed hands. Marketed under the banner of Section 180 of the Internal Revenue Code (IRC), the "residual fertility" deduction advertises to land buyers a first-year write-off of hundreds or thousands of dollars per acre. While the tax-savings benefits are attractive on the surface, residual fertility claims lack sound IRS guidance. Further, if projected per-acre deductions were to be realized, the cost would far exceed budgetary projections for all of Section 180. This Farm Bureau Intel walks through what the deduction is, how big the potential pool of claims could be, and what a farmer stands to lose if a claim is deemed inadmissible.

This analysis addresses claims made under the Section 180 election, which is taken in the year the land is acquired. Landowners who do not qualify for that election, such as those who cash-rent rather than farm the ground, or who bought in an earlier year, may instead capitalize residual fertility and recover it over several years under other provisions. Those claims fall outside this analysis.

What is Section 180?

Initially ratified by Congress in 1960, Section 180 lets a taxpayer engaged in farming elect to expense the cost of fertilizer, lime and similar soil amendments in the year paid rather than capitalize them. While data on the number of farmers across the country who use Section 180 claims is unavailable, the Congressional Joint Committee on Taxation (JCT) estimates that farmers save $150 million in taxes each year by using Section 180 tax deductions. estimates that farmers save $150 million in taxes each year by using Section 180 tax deductions.

Separate from the use of Section 180 to deduct the cost of applied fertilizer and similar related soil amendments is the concept of utilizing Section 180 to claim a deduction on unexhausted, residual fertilizer and similar minerals already present on newly purchased or inherited farmland. When farmland is purchased or inherited, the buyer allocates part of the purchase price (or stepped-up basis) to the unexhausted nutrients left by the prior owner and deducts that amount.