August 2026
By Larissa Zeiler
CPA, Leffel, Otis & Warwick, P.S.
Introduction
Have you purchased farmland recently? If you have, or you are thinking of making a purchase in the future, you may want to consider the residual soil fertility deduction. Most landowners are aware that land itself cannot be expensed as a tax deduction. Recently within the last few years, there has been increased discussion about the deductibility of excess soil nutrients.
In a nutshell, an active farmer or landowner who acquires land, either by purchase or inheritance, may elect to deduct the value of residual fertilizer present in the ground at the time of purchase (or inheritance). Although there is not a specific IRS code section for residual fertilizer, this deduction rests on IRS Code Sections 167 and 168, which govern depreciation rules, and IRS Code Section 180, which allows active farmers to immediately expense fertilizer. A word of caution: there is no black-and-white IRS guidance on this deduction, and as with any tax position lacking clear guidance, there is risk. However, it appears that the residual soil fertility deduction is a legitimate, defensible tax provision – if done correctly.
The Nuts & Bolts
Who qualifies: Agricultural landowners are eligible to deduct the value of residual nutrients in the soil at the time they purchase or inherit the land. The key is that the landowner, not the farming tenant, may take the deduction. For example, if the tenant is a C or S corporation, and the landowner is an individual or LLC, it is the individual/LLC who is entitled to the deduction.
What qualifies: Farmland, rangeland, and pastureland all qualify for the deduction. However, land enrolled in a CRP contract does not qualify.
When & How: Remember that only the excess fertility above a normal crop-usage baseline qualifies for the deduction, not the total value of the calculated fertilizer in the ground. The study analyzes levels of phosphorus, potassium, and other micronutrients that have a long-term, economic value in the soil. Therefore, it is essential to hire reputable, independent agronomists to conduct soil sampling and analysis, and prepare the residual nutrient study report necessary for your CPA to calculate the deduction. Preferably, the nutrient study report should be obtained immediately following the purchase, before additional fertilizer is applied by the new owner. Ideally the nutrient deduction should be taken in the tax year of purchase, although it is possible to retroactively take the deduction on land purchased in a prior year through an amended tax return or other methods. A reputable agronomy company can prepare the residual nutrients report from a prior year purchase through hindcasting, but keep in mind that older purchases (more than 10 years) carry a much greater audit risk.
A landlord may write off the residual nutrients over a period of time, with 5-7 years being the recommended amortization period. Alternatively, an active farmer may immediately expense the full deduction under Code Section 180 in the year of acquisition or amortize the excess nutrients over the recommended life. With either scenario, the tax savings from the deduction can be substantial in the right situation.
Squeezing the Greatest Value from the Deduction
Every landowner’s situation is different, and consideration must be given to determine if the deduction is worth the cost to obtain the nutrient study.
- Rate of return: Based on residual nutrient studies that I have reviewed, it appears that the average residual nutrient value for farm ground recently purchased in Southeast Washington/northern Oregon states is around $1,500-$1,800 per acre. The cost of the residual nutrient study hovers around $40 per acre, depending on the company. It is evident that the high dollar value, nutrient-rich farm ground yields the most net value from the soil study, while low-cost pastureland would yield the least net value from the study. Regional geography and soil health also play a role. As a practical example, assume you are a landlord who purchased 2,000 acres of farm land and the fertilizer study shows $1,500/acre of residual nutrient value. The total residual fertilizer deduction is $3 million. At an assumed annual 24% tax rate, the deduction would yield $720,000 of total tax savings over the 5-7 year amortization period!
- Ideal income tax scenario: The deduction is most beneficial for farmers who have substantial taxable income. There are significant tax planning opportunities created with the deduction, particularly when properly timed with liquidating corporate dividends or other large income streams. For farmers with minimal taxable income, the deduction is still available but may not be fully utilized each year. The deduction may also be suspended and carried forward to future years, depending on whether the landowner is active or passive. Each situation is different and is best coordinated with an agricultural CPA.
Best Practices
Until authoritative IRS guidance is issued, the residual soil fertility deduction does carry a certain level of risk, particularly because much is open to interpretation. Weak agronomic reports, inflated micronutrient values, and missing documentation can create IRS audit red flags. Some best practices concerning the deduction are to hire a qualified agronomy company to collect soil samples soon after purchase and prepare the report, take a conservative approach with regard to nutrient valuations and amortization of the nutrients, and coordinate with your agricultural CPA early on about the deduction. Your CPA can provide you with a list of reputable agronomy companies and advise on the best use of the deduction in your specific tax situation.