Assessment by Conservation District

In some localities, a soil or water conservation or drainage district incurs the expenses for soil or water conservation and levies an assessment against the farmers who benefit from the expenses. You can include as a deductible conservation expense the part of an assessment that:

• You would have included if you had paid it directly, or
• Covers expenses for depreciable property used in the district's business.

You include the amount in the year you pay or incur the assessment, depending on your method of accounting, not the year the expenses are paid or incurred by the district.

Assessment for Depreciable Property

You can include as a deductible conservation expense part of an assessment levied against you by a soil and water conservation or drainage district to pay for depreciable property. This includes items such as pumps, locks, concrete structures including dams and weir gates, draglines, and similar equipment. The depreciable property must be used in the district's soil and water conservation activities. Special limits, discussed next, apply to these assessments.

Amount to include. The amount you can include for any conservation district assessment for depreciable property is subject to the following limits.

• The total amount you can include for the assessment (whether one payment or paid in installments) cannot exceed 10% of the total assessment against all members of the district for the property.
• The maximum amount you can include each year is 10% of your deductible share of the cost + $500.

The amount you can include is added to your other conservation expenses for the year. The total for these expenses is then subject to the limit on the deduction, discussed later. See Table 6-1 for information on the limits.

Total limit. You cannot include more than 10% of the total amount assessed to all members of the conservation district for the depreciable property. This applies whether you pay the assessment in one payment or in installments. If your assessment is more than 10% of the total assessment, both the following rules apply.

• The amount over 10% is a capital expense and is added to the basis of your land.
• If the assessment is paid in installments, each payment must be prorated between the deductible amount and the capital expense.

Yearly limit. The maximum amount you can include in one year is the total of 10% of your deductible share of the cost as explained earlier, plus $500. If the assessment is equal to or less than the maximum amount, you can include the entire assessment in the year it is paid. If the assessment is more, the maximum amount you can include in one year is 10% of your deductible share of the cost. The remainder of the assessment is included in equal amounts (subject to the yearly limit) over the next 9 tax years.

Example 1. This year, the soil conservation district levies an assessment of $2,400 against your farm. Of the assessment, $1,500 is for digging drainage ditches. It is includible as a soil or conservation expense as if you had paid it directly. The remaining $900 is for depreciable equipment to be used in the district's irrigation activities. The total amount assessed by the district against all its members for the depreciable equipment is $7,000.

The total amount you can include for the depreciable equipment is limited to 10% of the total amount assessed by the district against all its members for depreciable equipment, or $700. The $200 excess ($900 - $700) is a capital expense you must add to the basis of your farm.

To figure the maximum amount to include for this year, multiply your deductible share of the total assessment ($700) by 10%. Add $500 to the result for a total of $570. Since the assessment, $700, is greater than the maximum amount deductible in one year, you can include only $70 of the assessment for depreciable property this year (10% of $700). The balance is included at the rate of $70 a year over the next 9 years.

You add $70 to the $1,500 portion of the assessment for drainage ditches. You can include $1,570 of the $2,400 assessment as a soil and water conservation expense this year, subject to the 25% of gross income from farming limit on deduction, discussed later.

Example 2. Assume the same facts in Example 1 except that $1,850 of the $2,400 assessment is for digging drainage ditches and $550 is for depreciable equipment. The total assessed by the district against all its members for depreciable equipment is $5,500. Your total deductible assessment for the depreciable equipment is limited to 10% of this amount, or $550.

The maximum deductible this year for the depreciable equipment is $555 (10% of your total deductible assessment, $55, plus $500). Since the assessment for depreciable property is less than the maximum deductible, you can include the entire $550. The entire assessment, $2,400, is deductible as a soil and water conservation expense this year, subject to the 25% of gross income from farming limit on deduction, discussed later.

Sale or disposal of land during 9-year period. If you sell or dispose of the land during the 9-year period for deducting conservation expenses, any remaining assessment not yet included is added to the basis of the property.

Death of farmer during 9-year period. If the farmer dies during the 9-year period, any remaining assessment not yet included is included in the year of death.

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