What Is the Revenue Code 180 Deduction for Farmers?

A tax deduction under Internal Revenue Code (IRC) Section 175 allows those in the farming business to currently deduct expenses for soil and water conservation. Instead of capitalizing these costs, which involves adding them to the land’s basis and recovering them upon sale, this provision permits an immediate write-off. The purpose of this tax incentive is to encourage farmers to implement practices that preserve the quality and productivity of their land, supporting environmentally responsible agricultural operations.

Eligibility for the Deduction

To qualify for the soil and water conservation deduction, a taxpayer must meet two requirements. The first is that the individual or entity must be engaged in the “business of farming.” This means cultivating, operating, or managing a farm with a profit motive, whether as an owner or a tenant. Operating a farm for recreational or hobby purposes does not qualify.

The definition of being in the business of farming extends to landowners who receive rent based on farm production, such as a crop-share arrangement. A landlord receiving a fixed cash rent is generally not considered to be in the business of farming unless they materially participate in the farm’s operation or management. This ensures the tax benefit is directed toward those actively involved in agricultural production and assuming its financial risks.

The second condition is that the expenses must pertain to “land used in farming.” This is defined as land currently or previously used by the taxpayer or their tenant for producing crops, fruits, other agricultural products, or for sustaining livestock. Expenditures on land that has never been used for farming, such as costs to convert raw, uncultivated land for a new farm, do not qualify.

Qualifying Conservation Expenses

The deduction under IRC Section 175 applies to specific types of expenditures, provided they are consistent with a conservation plan approved by the Natural Resources Conservation Service (NRCS) of the Department of Agriculture or a comparable state agency. These expenses generally involve the treatment or movement of earth.

• Costs for leveling, grading, terracing, and contour furrowing to manage water flow and prevent soil loss
• The construction of certain earthen structures, such as dams, drainage ditches, and irrigation ditches
• The eradication of brush
• The planting of windbreaks to protect fields from wind erosion

Assessments from a soil or water conservation or drainage district may also be deductible. If an assessment is levied to finance activities that would have been deductible if the farmer paid for them directly, that portion of the assessment is a qualifying expense.

It is important to distinguish these deductible expenses from capital expenditures that must be depreciated over time. The cost to purchase or install depreciable assets is not eligible for this immediate deduction. This includes items made of concrete or masonry, such as tanks, reservoirs, or pipes, as well as pumps. These items are considered business assets and their costs are recovered through depreciation, not the Section 175 conservation expense election.

Calculating the Deduction Limit

The annual deduction for soil and water conservation expenses is subject to a limitation. A farmer cannot deduct more than 25% of their “gross income from farming” for the tax year. This ceiling prevents a disproportionately large deduction from offsetting income in a single year. Understanding what constitutes gross income from farming is therefore necessary for the calculation.

Gross income from farming includes the income derived from producing crops, livestock, or other agricultural products, which encompasses proceeds from the sale of livestock and produce raised on the farm. It also includes gains from the sale of draft, breeding, dairy, or sporting animals. However, it does not include gains from the sale of farm machinery or land.

If a farmer’s total qualifying conservation expenses in a year exceed the 25% limit, the excess amount is not lost, as the tax code allows for an unlimited carryover of these excess expenses to subsequent tax years. For example, if a farmer has a gross income from farming of $200,000, their deduction limit is $50,000 (25% of $200,000). If they incurred $70,000 in qualifying expenses, they could deduct $50,000 in the current year and carry the remaining $20,000 forward to the next year, where it would again be subject to that year’s 25% limit.

Claiming the Deduction and Recapture Provisions

A farmer elects to deduct these costs by claiming them on their tax return for the first year in which they are paid or incurred. This is typically reported on Schedule F (Form 1040), Profit or Loss From Farming. Once this election is made, the farmer must consistently deduct all eligible conservation expenses in future years, subject to the annual limit.

A consequence arises if the improved farmland is sold. If farmland is sold at a gain within ten years of its acquisition, a portion of the previously deducted conservation expenses may be “recaptured.” This means the portion of the gain attributable to the deduction is taxed as ordinary income rather than the potentially lower capital gains rate. This provision prevents taxpayers from converting ordinary deductions into capital gains through a quick sale.

The amount of recapture depends on how long the land was held. If the land is sold within five years of acquisition, 100% of the deductions are subject to recapture as ordinary income, up to the total gain on the sale. The recapture percentage then decreases by 20% for each additional year the land is held. For a sale in the sixth year, 80% is recaptured; in the seventh year, 60% is recaptured. If the land is held for ten years or more, none of the conservation expenses are recaptured upon its sale.