Conservation Expenses

Deductible conservation expenses are those made for land you or your tenant are using, or have used in the past, for farming. They include, but are not limited to, expenses for the following.

Table 6-1

1. The treatment or movement of earth, such as:
   1. Leveling,
   2. Conditioning,
   3. Grading,
   4. Terracing,
   5. Contour furrowing, and
   6. Restoration of soil fertility.
2. The construction, control, and protection of:
   1. Diversion channels,
   2. Drainage ditches,
   3. Irrigation ditches,
   4. Earthen dams, and
   5. Watercourses, outlets, and ponds.
3. The eradication of brush.
4. The planting of windbreaks.

Exceptions. Expenses to drain or fill wetlands, or for center pivot irrigation systems, are not deductible as soil and water conservation expenses. These expenses are added to the basis of the land.

If you choose to deduct soil and water conservation expenses, you cannot exclude from gross income any cost-sharing payments you receive for those expenses. See chapter 4 for information about excluding cost-sharing payments.

New farm or farm land. If you acquire a new farm or new farm land from someone who was using it in farming immediately before you acquired the land, soil and water conservation expenses you incur on it will be treated as made on land used in farming at the time the expenses were paid. You can deduct soil and water conservation expenses for this land if your use of it is substantially a continuation of its use in farming. The new farming activity does not have to be the same as the old farming activity. For example, if you buy land that was used for grazing cattle and then prepare it for use as an apple orchard, the expenses will qualify.

Land not used for farming. If your conservation expenses benefit both land that does not qualify as land used for farming and land that does qualify, you must allocate the expenses. For example, if the expenses benefit 200 acres of your land, but only 120 acres of this land are used for farming, then 60% (120 x 200) of the expenses are deductible. You can use another method to allocate these expenses if you can clearly show that your method is more reasonable.

Depreciable conservation assets. You cannot deduct your expenses for depreciable conservation assets. There is, however, an exception for an assessment for depreciable property that a soil and water conservation or drainage district levies against your farm. See Assessment for Depreciable Property, later.

You must capitalize direct expenses for structures or facilities subject to an allowance for depreciation, such as depreciable nonearthen property made of masonry or concrete. Expenses for depreciable property include those for materials, supplies, wages, fuel, hauling, and moving dirt when making structures such as tanks, reservoirs, pipes, culverts, canals, dams, wells, or pumps composed of masonry, concrete, tile, metal, or wood. You recover your capital investment through annual allowances for depreciation.

However, soil and water conservation expenses for nondepreciable earthen items such as earthen terraces and dams are deductible.

Water well. The cost of drilling a water well for irrigation and other agricultural purposes is a capital expense and not deductible as a soil and water conservation expense. You recover your cost through depreciation. You must also capitalize your cost for drilling a test hole. If the test hole produces no water and you continue drilling, the cost of the test hole is added to the cost of the producing well. You can recover the total cost through depreciation deductions.

If a test hole, dry hole, or dried-up well (resulting from prolonged lack of rain, for instance) is abandoned, you can deduct your unrecovered cost in the year of abandonment. Abandonment means that all economic benefits from the well are terminated. For example, filling or sealing a well excavation or casing so that all economic benefits from the well are terminated would be abandonment.

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