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

Cost Segregation

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 of course hold true for farmland fertilizer cost segregation, as well.

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

Cost segregating the latter requires exercising and applying good science to determine a reasonable result. For instance, (e.g., circa 2008-2010 in the U.S. Southeastern Seaboard coastal plain region), ask yourselves how much would 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 the typical high-yielding farmland available today in the marketplace.

Beginning in 2008 when fertilizer inputs skyrocketed and in conjunction with working with local Agriculture Consultants while watching this tax issue evolve for many years; we knew then it was time to roll up our sleeves and dig in. Our mission truly began with the collaboration of a local Farmer holding a BS degree in Agronomy, who had found it quite taxing on how to apply these soil exhaustion concepts to farmland he had recently acquired.

For decades you see, farmers and farmland owners, and their tax advisors, truly had no definitive guidance.

So, a farmer and his CPA, together, decided to bring their practical knowledge and experience to the table seeking to resolve longstanding uncertainties that were clouding this tax issue. After many months of collaboration, dozens of emails with editorial comments, between us and NCSU Extension Specialist/Senior Lecturer Guido van der Hoeven (BS in Natural Resource Management-Soil (1976-1980)), and then between him and his trusted colleague, Philip E. Harris, JD, we finally hit pay dirt.

• Thanks to these two eminent Agricultural and Tax Law Professionals, we’d like to believe that we spearheaded the first definitive opinion culminating in their seminal article titled "Fertilizer or Nutrients Acquired with Land".
• Published in their Fall-2011 Agricultural Income Tax Issues workbook; their continuing educational program was taught and used by perhaps 30,000 seminar attendees, including Farmers, Farmland owners, and their Tax/Professional advisors.
• And later with a few edits, this article was again published for use in their Fall-2014 Agricultural Income Tax seminars.
• Also, soil test data and soil facts available from land grant universities like NC State University and from soil test labs like NCDA&CS continue to be vital in these endeavors undertaken by our associates, two CPAs and two farmers (who have agronomy degrees and beneficially own farmland).