Consider the Risks When Taking a Residual Fertility Deduction

By Kristine Tidgren and Tiffany Dowell Lashmet

Consider the Risks When Taking a Residual Fertility Deduction

There’s been much recent discussion about a “residual fertility” deduction for farm and ranchland. It’s been common practice among farmers for many years to take a tax deduction for the value of unexhausted fertilizer remaining in soil purchased with land. In recent years, however, this practice has expanded to include large deductions for the value of all soil nutrients, not necessarily those linked to prior fertilization. Questions about the legal basis for these deductions have increased as the value of these deductions have risen. 

Fertilizer Expenditures and Section 180

To understand this issue, it is important to understand the basis for deducting fertilizer in the first place. Years ago, the IRS required farmers to capitalize and deduct fertilizer costs over the useful life of the fertilizer. Because the fertilizer would not be used up in one year, the deductions had to be spread out. In 1960, Congress changed course, recognizing that farmers would benefit from deducting fertilizer expenses in the year paid. Section 180 thus allows farmers to elect to deduct in the year of application the cost of fertilizer, lime, and similar materials applied to land used in farming.