| Industry Issues / Soil and water conservation and erosion prevention costs |  |
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| Farmers
may deduct currently, as business expenses, certain outlays for soil and
water conservation or erosion prevention that are incurred to maintain
the farm and preserve its normal productivity, and not to increase its
value or convert it to a new use. Costs that result in the acquisition
of depreciable property must be capitalized. But a farmer may elect to
deduct certain non-depreciable expenditures for conservation, etc. (see
below), with respect to land he uses for farming if the expenditures are
consistent with a federal or state approved conservation plan. Qualifying
expenditures include costs of: treating or moving earth (e.g., leveling,
terracing or restoring fertility); constructing and protecting diversion
channels, drainage ditches, earthen dams; eradicating brush; planting
windbreaks; producing vegetation primarily to conserve soil or water, or
prevent soil erosion. Costs of draining or filling wetlands or for
center pivot irrigation systems don't qualify. Nor does the election
apply to depreciable assets. The
amount of conservation, etc., expenses a farmer may deduct in any tax
year under this election can't exceed 25% of his gross income from
farming for the year. Any excess may be carried over to and deducted in
the next tax year (subject to that year's 25% ceiling). Elect
by deducting the expenses on the return for the first tax year they are
incurred. IRS consent is
needed to elect for a year other than that first year. Once the election
is made, a farmer must continue to deduct all qualifying expenditures
(subject to the 25% ceiling) unless IRS consents to a change. A farmer must recapture as ordinary income (use Form 4797) part of the conservation, etc., expenses if the farmland is disposed of after being held for less than 10 years. |
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