For taxpayers engaged in the business of farming, certain soil and water conservation expenses may be deductible under Internal Revenue Code (IRC) Section 175. These deductions are available for expenses paid to conserve soil and water, prevent erosion, or support endangered species recovery on land used in farming. The deduction is limited to 25% of gross income from farming for the tax year, and any excess may be carried forward to future years, subject to the same 25% limit in each year.
Eligible Conservation Expenses
- Treatment or movement of earth: leveling, grading, conditioning, terracing, contour furrowing, and restoring soil fertility.
- Construction, control, and protection of: diversion channels, drainage ditches, irrigation ditches, earthen dams, watercourses, outlets, and ponds.
- Eradication of brush and planting of windbreaks.
- Site-specific management actions under approved Endangered Species Act recovery plans.
Expenses for draining or filling wetlands or preparing land for center pivot irrigation systems are not deductible as conservation expenses. Instead, these are treated as capital expenditures and added to the basis of the land.
Requirements for Deduction
- Expenses must be consistent with a conservation plan approved by the Natural Resources Conservation Service (NRCS) of the U.S. Department of Agriculture or an approved recovery plan under the Endangered Species Act. If no such plan exists, a comparable state agency’s plan may be used.
- The land must be used in farming at the time expenses are incurred. If land is not used in farming (e.g., uncultivated or undeveloped), expenses must be allocated based on the portion benefiting qualifying farmland.
- Conservation expenses for land in a foreign country do not qualify for this deduction.
Gross Income from Farming
Gross income from farming includes income from the production of crops, fish, fruits, livestock, and gains from sales of breeding or dairy livestock. It excludes gains from selling farm machinery or land. For example, if a taxpayer reports $85,000 on Schedule F (Form 1040) and $15,000 in gain from cull breeding animals on Form 4797, line 2(g), total gross farm income is $100,000. The 25% deduction limit would then be $25,000 ($100,000 × 25%).
Carryover of Unused Deductions
If conservation expenses exceed the 25% limit in a given year, the excess may be carried forward to future tax years. However, the deduction in any future year cannot exceed 25% of that year’s gross farm income.
Business of Farming
To deduct conservation expenses, the taxpayer must be in the business of farming—defined as cultivating, operating, or managing a farm for profit. This includes livestock, dairy, poultry, fish, fruit, truck farms, plantations, ranches, ranges, orchards, and plant nurseries. If a farm is rented out and the owner does not materially participate in its operation, conservation expenses are not deductible and must be capitalized.
Sale of Farmland
If farmland is sold within five years of acquiring it or after holding it for more than five but less than ten years, gain on the sale may be treated as ordinary income up to the amount previously deducted for soil and water conservation expenses. Unused carryover deductions cannot be adjusted at sale but may be used if the taxpayer acquires another farm and resumes farming.
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Disclaimer: Always verify details with current IRS forms and instructions or consult a tax professional for personalized advice. The information provided is general and may not apply to all individual circumstances.