IRS codes can help farmers and landowners

Rarely do farmers and landowners receive news from the Internal Revenue Service with open arms, but a law and taxation attorney said they may be missing out on a provision that can help reduce their taxes.

Roger McEowen, a professor of agricultural law and taxation at the Washburn University School of Law, said deducting residual, or excess soil fertility provision is permitted by the IRS. In light of rising farmland values and fertilizer prices, buyers, who must be active in the operation, can allocate part of the total purchase price of the farmland to fertilizer that the seller applied before the purchase. The concept also applies to inherited land.

McEowen spoke in February during Crop Quest’s Grower Focus in Dodge City, Kansas. Such an allocation will allow a deduction for the cost of nutrients present in the soil rather than the cost being added to the land’s value. Deducting “residual soil fertility” can occur if the taxpayer can show that the nutrients are a separate asset that can be distinguished from the soil and can establish a fair market value, then part of the purchase price of the land can be allocated to the nutrients.

The IRS ratified the concept in 1992, and McEowen (pictured at top) agreed it is a helpful provision that unfortunately many people in the ag industry may have overlooked.

“When you buy farmland, it is comprised of many components—soil, mineral rights, water rights, air rights,” he said. “It’s conceptually similar to the IRS allowing you to take a deduction on a declining water table in the Ogallala Aquifer.”

However, the IRS provided some guidelines, but little was said about baselines.  In 1992, the IRS released an IRS’ Technical Advice Memorandum that provides additional clarity. The memorandum requires the taxpayer to establish the presence and extent of fertility at the time of acquisition. The taxpayer must provide a basis to measure the increase in soil fertility and provide evidence indicating periods for which the residual fertility will be exhausted.

“To meet all four points, you will need a formal agronomist report, and you need to get that as close as you can to the purchase or acquisition date,” McEowen said.

A thorough report is likely to cost $40 to $50 per acre, and he reiterated the importance of getting it completed as close as possible to the purchase or acquisition date.

A separate provision, IRC Section 180 allows a taxpayer engaged in the trade or business of farming to annually elect (by deducting the expense on the return) the cost of fertilizer, lime, potash or other materials that enrich or condition the land in farming that has been either purchased or acquired during the tax year.

McEowen notes that it is important to have an accountant who is not only familiar with farming and ranching, but also IRS regulations.

Nathan Woydziak, precision agriculture manager at Crop Quest, said his company has seen an increase in requests in recent years.

In 2020, a grower from Great Bend contacted a Crop Quest agronomist, and he asked about the excess fertility provision. Woyzdiak followed up with an accountant who confirmed its importance. The first request centered on phosphorus and potassium. By 2023, more inquiries arrived and covered six nutrient. By 2025, Crop Quest covered 11 nutrients.

He outlined the process and like McEowen, he noted while there are always grey areas and interpretations in tax codes, Crop Quest looks to use a regiment that outlines grid size, accuracy and lab analysis of 20 nutrients.

“We look at how much fertilizer is present and how much is being exhausted over time,” Woydziak said. “We can create a fertility ledger that shows historic levels plus production and fertility history.”

He noted the importance of timeliness. “The farther you go back the more difficult it (documentation) becomes.”

McEowen also noted that it applies to farmers and landlords that use a shared arrangement.  Landlords that use a cash-rental basis cannot deduct the fertilizer expense are not allowed to use it.

In this case, the tax codes work well for the agricultural producer who wants to expand.

McEowen also reviewed the One Big Beautiful Bill Act, which was passed by Congress in July 2025 and permanent provisions that can help farmers and ranchers with long-term decisions. Many of the provisions are now in effect.

He noted that in the fall farmers will receive higher payments from Profit Loss Coverage and Agriculture Risk Coverage programs. Farmers don’t have to make an upfront decision yet, and they have time to see which one works best. One plus is the PLC and ARC crop insurance signups won’t occur until after the planting season.

Congress will need to finish a farm bill that can address other necessary items that assist producers, he said.

All taken together, despite the current economic climate, McEowen says his message is that the result of OBBBA and other actions, the picture for many farmers and ranchers is looking brighter.

Dave Bergmeier can be reached at 620-227-1822 or [email protected].