Section 175 Soil and Water Conservation Expense Deduction

Internal Revenue Code Section 175 allows individuals in the farming business to deduct certain costs for soil and water conservation. This provision permits an immediate deduction for qualifying expenses in the year they are paid, rather than capitalizing them by adding the costs to the property’s basis to be recovered over time.

Eligibility for the Conservation Expense Deduction

To qualify for the deduction, a taxpayer must be engaged in the “business of farming.” This is defined as cultivating, operating, or managing a farm for profit, as either an owner or a tenant. This includes stock, dairy, fruit, and truck farms, as well as ranches and orchards. A landlord receiving rent based on farm production, such as a crop-share, is also considered to be in the business of farming.

The expenses must also pertain to “land used in farming,” meaning land currently or previously used for agricultural production by the taxpayer or their tenant. The land must be used for producing crops, fruits, or other agricultural products, or for sustaining livestock. Timber production and hobby farming do not qualify as a business of farming.

Covered Soil and Water Conservation Expenses

The deduction is available for expenditures consistent with a conservation plan approved by the Natural Resources Conservation Service (NRCS) or a comparable state agency. Qualifying expenses involve the treatment or movement of earth, including leveling, grading, terracing, and contour furrowing. The construction of diversion channels, drainage ditches, irrigation ditches, earthen dams, and watercourses are also eligible.

The costs of eradicating brush, planting windbreaks, and implementing measures for endangered species recovery are also covered. Assessments from a soil, water conservation, or drainage district may be deductible if the funds are used for projects that would otherwise qualify. These expenses must be for improvements that are not subject to depreciation.

Certain expenditures are excluded from this deduction. The cost of purchasing or installing depreciable assets, such as tanks, pumps, or pipes made of concrete or metal, does not qualify and must be recovered through depreciation. Expenses for draining or filling wetlands or preparing land for center pivot irrigation systems are also ineligible. Any expense otherwise deductible as an ordinary business expense, like routine ditch cleaning, is not a conservation expenditure.

Calculating the Annual Deduction Limit

The annual deduction for soil and water conservation expenses is capped at 25% of the taxpayer’s “gross income from farming.” This income includes revenue from the sale of crops, livestock, and other farm products. It also includes gains from selling certain livestock held for draft, breeding, dairy, or sporting purposes, but excludes gains from selling poultry, farm machinery, or land.

For example, a farmer with a gross income from farming of $120,000 can deduct a maximum of $30,000 for these expenses. If their eligible expenses were $40,000, they could only deduct $30,000 in the current year.

Qualifying conservation expenses exceeding the 25% limit can be carried forward indefinitely to succeeding tax years. In each subsequent year, the carried-over amount is added to any new conservation expenses, and the total is again subject to the 25% limit based on that year’s gross income from farming.

Making the Election and Recapture Provisions

A taxpayer elects to deduct these expenses by claiming them on Schedule F (Form 1040), Profit or Loss From Farming, for the first year the costs are incurred. Once adopted, this method must be used for all qualifying conservation expenditures in subsequent years unless the IRS approves a change.

If the farmland is sold, “recapture” provisions may apply to prevent the conversion of ordinary income into capital gains. If the land is sold within nine years of its acquisition, a portion of the deduction is recaptured as ordinary income. The recaptured amount is the lesser of the total deductions taken or the gain from the sale, multiplied by a percentage based on how long the land was held.

The recapture percentage is based on the holding period:

• Sold within five years: 100%
• Sold in the sixth year: 80%
• Sold in the seventh year: 60%
• Sold in the eighth year: 40%
• Sold in the ninth year: 20%

If the land is held for ten years or more, none of the conservation expense deductions are recaptured upon its sale.