Get the Facts About Legacy Nutrient Deductions
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An Introduction to Legacy Nutrient Deductions
Agricultural landowners are familiar with the application of depreciation for fencing; irrigation system etc. yet fewer farmers are aware of legacy nutrient deductions (LNDs). This opportunity credits the depreciation of the value of the soil nutrients that were present in the land at the time of acquisition or inheritance.
Legacy nutrient deductions allow landowners to deduct the value of these nutrients from their taxable income, reducing their income tax liability. This deduction is based on the fact that soil nutrients are part of the real estate purchase and are deductible under existing U.S. tax law.
LNDs have existed as part of federal tax policy since the adoption of IRC Section 180 in 1960. Section 180 provides a current deduction for the soil nutrient value (residual fertility) in land (a) purchased or inherited in the year that the deduction is pursued, (b) that is used for agricultural production, and (c) where the owner is actively engaged in farming, ranching, or in some cases, production timber. Today’s testing methods have overcome historic hurdles to be able to accurately and cost-efficiently test the soil.
How to Claim an LND
To claim these deductions, landowners must work with qualified professionals who can accurately assess and document the soil’s nutrient content according to IRC guidelines. This process involves comprehensive soil testing and analysis to determine nutrient levels and their value.
Farmers and ranchers who currently own or who are contemplating acquiring land can significantly benefit from an LND strategy. However, though long present in the IRC, LNDs have not been widely understood or used. If a rural landowner qualifies, the tax savings resulting from the use of LNDs not only return cash to a landowner’s pocket, but it also can provide additional working capital, extra resources to buy more land, capital to replace worn-out equipment, and improve infrastructure for farm/ranch lands.
Today farmland owners can work with a reputable third-party group to provide the appropriate data collection to the IRS. If you meet the criteria for being “in the business” of farming or ranching, you may qualify for the tax code section that allows you to take the entire deduction in the year of filing. If you simply collect cash rent, you may qualify for three other sections of the tax code that allow you to spread the deduction over several years.
Key Points when considering an LND
- Only use LNDs for farm/ranch/production timberland.
- Only use qualified service providers: agronomy experts with a record of experience and with a résumé of successful defense of the methodologies in accordance with the 1995 MSSP guidelines.
- Consult with CPAs and other tax professionals on the best of the four Code Sections for the landowner’s particular situation and the best way to file for the deductions, whether for the current tax year or for past tax years.
- Consult with an experienced attorney to determine whether the resulting losses from an LND are “passive” or “active” based on the landowner’s activity.
- Landowners should obtain an expert valuation/appraisal advisor and conduct soil tests as close to the time of the land acquisition as possible. However, service providers with appropriate forensic agronomy expertise can enable landowners to pursue LNDs many years after purchase/inheritance.
- Determine, if possible, the fertilizer (what kind and how much) applied by the previous landowner.
Working with the lawyers at Anthony J, Madonia & Associates can provide the oversight and guidance needed to make informed decisions and protect your operations. Our attorneys support our clients at every stage with legal insight that aligns with long-term planning and practical execution.