"Any one may so arrange his affairs that his taxes shall be as low as possible; he is not bound to choose that pattern which will best pay the Treasury; there is not even a patriotic duty to increase one's taxes." —Judge Learned Hand

Cite: Helvering v. Gregory, 69 F.2d 809, 810-11 (2d Cir. 1934)

FertileDirt™ Cost Segregation

If you've purchased or inherited farmland, you may be entitled to benefit from tax amortization/write-offs ranging from 10% to 30% of its cost or inherited stepped-up cost basis within 7 to 15 years of ownership, or less, depending on price, its soil fertility, mix and concentration of fertilizer nutrients, and your particular tax situation including your marginal income tax and self-employment tax brackets. This is what we do using our FertileDirt™ cost segregation program.

What is Cost Segregation?

Cost Segregation services spawned out of the landmark 109 T.C. 21, 54-55 (1997) HCA case, which allows commercial property owners (e.g., building owners) to accelerate depreciation and reduce their amount of taxes owed—increasing cash flow. The August 2004 issue of the Journal of Accountancy states: “A taxpayer can substantially increase cash flow by segregating property costs.” Generally for commercial building property owners, present value of those tax savings may approximate 16%.

What held true for commercial building cost segregation should hold true for farmland fertilizer cost segregation. Why not?

One way to look at it is to dissect the anatomy of land transitioned to farmland. Generally, the aquiring farmer and farmland owner pays:

  • X dollars for the infertile dirt itself; plus
  • X dollars to clear and ready the land for planting; plus
  • X dollars per year for many years applying fertilizer nutrients to transition the native/virgin—infertile dirt, into fertile dirt suitable to produce a crop.

Cost segregating the latter requires exercising and applying good science to determine a reasonable result. For instance, circa 2008—2010, ask yourselves how much does it take? Generally, wouldn’t it likely require some $80 to $100 per acre applying fertilizer annually for 7 to 8 years before one can raise the native/virgin soil fertility levels commensurate with typical high-yield farmland available today in the marketplace, at least.

Will our FertileDirt™ substantiation and supporting data hold water? One difference is commercial property owners can hang their hat on the HCA case spawning IRS cost segregation guidance. Farmland owners have no such definitive fertilizer cost-seg. guidance, yet.

  • What we do have is a private letter ruling, which in of itself may not be substantial authority, PLR 9211007.
  • But thanks to a farm extension senior lecturer at NC State University (NCSU) whom we’ve consulted with extensively on this issue among others over the years, and with his associates around the country including a Professor of Agricultural and Applied Economics at University of Wisconsin—Madison, now we will have a more definitive and updated opinion than ever before with their seminal article titled "Fertilizer or Nutrients Acquired with Land".
  • Also, soil test data and soil facts available from NCDA&CS and other soil test labs continue to be vital in our efforts.

The tax amortization/write-off issues from cost segregating fertilizer has not evolved into guidance as definitive as commercial property buildings; however, it should be a tax deduction given appropriate facts and circumstances. Nowhere can we find does it say taxpayers acquiring a beneficial ownership interest in farmland cannot claim it. Generally, rulings and opinion imply it must be supported by good science appropriately applied to a taxpayer’s particular ownership and income tax situation.