As we move through the growing season, summer is a great time to revisit your farm’s financial strategy and identify opportunities that can improve year-end tax outcomes. One area that continues to provide meaningful value, but is often overlooked: deduction for residual fertilizer. Along with a spike in fertilizer prices and the rising cost of land, this deduction has grown in popularity (and the dollar amount of potential benefit) in recent years.
What is Residual Fertilizer? Residual fertilizer, sometimes called residual soil fertility, refers to the excess nutrients remaining in the soil from previous fertilizer applications that are still available to support future crops. When farmland is acquired, the value of this residual fertility may be deducted in many situations.
Benefits of Deducting Residual Fertilizer:
- Tax Savings: By deducting the value of residual fertilizer, you can significantly reduce your taxable income. The deduction can be taken immediately or amortized over several years.
- Improved Cash Flow and Return on Investments in Farmland: The cost of farmland is normally just held as basis to a taxpayer and provides no current tax deduction or benefit. Substantiating the presence of residual fertilizer to capture a current tax deduction effectively increases purchasing power by reducing your after tax cost, and potentially decreases the amount of debt needed to cash flow a new land purchase. The impact will vary based on tax bracket, financing terms, and how the land is operated, and it should be viewed as one part of the overall economics of a land acquisition.
How to Claim the Deduction: To take advantage of residual fertilizer, it is necessary to have grid sampling done to determine soil fertility levels. The deduction can apply to land acquisitions in the current tax year and even from earlier years if you initially failed to consider the deduction.
IRS guidance on this topic is still very limited. If you have any questions or think residual fertilizer may apply to prior or upcoming land acquisitions, we recommend reaching out so we can help you work through your specific situation. The sooner we are involved, the better we can help you evaluate the opportunity and document it appropriately. Thank you for your continued trust in Williams and Company, and for allowing us to work with you on your complex tax matters this tax season.