—Mark Twain

History of the Fertilizer Deduction

Residual Fertilizer?

Early on Dr. Neil E. Harl questioned the efficacy of deducting residual fertilizer supply in his April 23, 2004 Agricultural Law Digest Volume 15, No.9 article about the then current situation focusing primarily on a 1991 private letter ruling PLR 9211007, which may be the only formal IRS ruling ever issued.

Though Roger McEowen, a Professor of Agricultural Law and Taxation, has been writing about it for many years, some 20 years after this tax topic began receiving press coverage, he published a June 7th, 2023 article titled: Deducting Residual (Excess) Soil Fertility – Does the Concept Apply to Pasture/Rangeland?

For our purposes here in the Southeast we'll not focus on Pasture/Rangeland; rather, let's focus on Professor McEowen's section on Allocation:

• Facts and relevant points from this article assume farmland is purchased for $8,000/acre:
• An agronomist pegs the excess fertility at $4,000/acre;
• Comparable land in the area without excess fertility sells for $7,000/acre; so
• When the $4,000/acre for excess fertility is added to the land value without excess fertility, the total is $11,000; therefore
• The land is 63.6% of the total value, and the excess fertility is 36.4% ($4000 divided by $11,000).
• The purchase price was $8,000/acre; 36.4% of that amount is $2,912/acre in soil fertility; so McEowen concluded
• That will be the amount that IRS will accept as the deduction for excess fertilizer supply – not the full $4,000/acre determined by the agronomist.

A farm with this relatively high level of fertility would likely be located in the Midwest, not in the US Southeastern region. Obviously we do not have the details; however, a few questions come to mind:

1. Pricing the amount of fertilizer or nutrients in the soil acquired with land could very well total 1/3rd of the total value of the land (in the Southeast).
2. However, we might question the agronomist’s computations and how they determined the amount of excess fertility:
   • $4000 per acre seems like a large amount even for the Midwest;
   • Especially if this excess is over and above a baseline amount that is deemed unavailable to the plant (in a normal plant rotation)?
3. However, if in fact this example truly proved to be a bargain purchase (discounted almost 27%); we would agree with Professor McEowen’s allocation formula, which prorates a discount to the amount of soil fertility.
4. The methodology underpinning residual excess soil fertility measures the amount of nutrients that are available and accessible for plant uptake, which would constitute a first-year fertilizer expense deduction under IRC §180; but only available for the farmer/landowner that materially participates in the farming operation; however
   • For the farmland owner who does not materially participate in the farming operation (e.g., an out of state heir/owner) the rate of exhaustion will matter; and
   • Why does the Excess Residual Fertilizer approach weigh the value of comparables: A) farmland with excess soil fertility; versus B) farmland without such excess?
   • Given Mehlich-3 extraction method only measures what is available for plant uptake, what does excess residual fertilizer actually mean?

Anyway, unlike the Midwest, where soil fertility deductions may average more than $1,700 per acre, farmland in the Southeast will generally be less fertile. The Ultisols in the Southeast are highly weathered with inherently low cation exchange capacity and base saturation.

The IRC §180 election allows expensing fertilizer cost when applied by a farmer during the year on Schedule F as-if it is not a capital outlay (or when purchased with the land, apparently); so, generally, it may only be used by a farmer who materially participates in the farming operation. So, proving multi-year exhaustion of such Ag/Nutrients may not be required for farmers. On the other hand, a farmland owner who passively operates the land for rent may not claim fertilizer expense (under IRC §180).

Rather, the passive farmland owner may only claim depreciation of Soil Nutrients acquired with the Land under IRC Code §§ 167 or 168 (as a buyer or an heir), based upon the level of exhaustion.

So, given the reduced level of fertility value in the US Southeastern region, and to accommodate farmland owners who do not materially participate in a farm rental or sharecrop operation; we needed more than one way to skin this cat. Cost segregation allocating Fertilizer or Nutrients Acquired with the Land became key in resolving those issues.