We spoke with Jordan Kull of Boa Safra Ag, an organization which works with landowners to help determine their future prospects and for future planning by looking at data, analyzing specific data, and future reporting, about Tax Code 180, which can have important implications for landowners. Tax Code Section 180 is one of several sections of the Federal Tax Code that allow owners of agricultural land to benefit from Legacy Nutrient Deductions™. Legacy nutrients are the crop and forage producing nutrients (such as your Ps, Ks, and micros) that are present in your soil at the time you purchase or inherit your property. Tax Code Section 180, in addition to other sections, allow you to deduct the value of these legacy nutrients to help you spend less on your income taxes.
Tax Code Section 180 allows landowners to deduct the full value of their legacy nutrients in the year of filing, while other sections require that the deduction be spread out over multiple years.
Landowners must meet the criteria of being “in the business” of farming, ranching, or managing timberland to qualify for Tax Code Section 180, and the deduction must be filed on a timely basis.
How Much Can Tax Code Section 180 Save a Landowner?
Legacy Nutrient Deductions™ can be quite significant, typically falling within 10%-15% of the market value of the land. This can shelter a substantial amount of operating profit, giving farmers and ranchers another tool in their toolbelt to optimize their profitability.
To qualify for Tax Code Section 180, ranching landowners must meet the criteria of being “in the business” of ranching, farming, or timberland management.
The benefits can extend well beyond saving on income taxes. Farmers and ranchers can benefit from deductions on land that they’ve already bought or inherited, rather than spending money on seed, and fertilizer, or buying depreciating assets like tractors at the end of each year. Farmers and ranchers can also reinvest their tax savings into new land purchases, which they can take this deduction on and continue to build their land base!
Typical Costs Associated With Claiming The Deduction
In order to qualify for Legacy Nutrient Deductions™, landowners need to retain a qualified third party that can conduct the data collection, analytics, and reporting in a consistent fashion with IRS requirements.
Boa Safra Ag is the market leader in providing these data collection, analytics, and reporting services. The company operates in all of the lower 48 states, and has services over 3,000 clients. Their team uses advanced scientific methods to accurately read soil data and provide audit-tested reports. Groups like Boa Safra charge per-acre fees to their landowner clients. Landowners would also need to account for their CPA costs associated with filing the appropriate tax forms.
In general, landowners can expect to pay between $35 and $50 per acre to groups like Boa Safra, and nominal additional one-time filing fees to their CPAs.
At What Purchase Price Does Tax Code Section 180 Make Financial Sense?
The financial returns can be substantial for landowners, in many cases exceeding $1,500/acre of deduction. Landowners need to have enough basis (what they paid or inherited the property for) to benefit from these deductions. In general, we find landowners with at least $800 per acre of basis receive the greatest benefit of pursuing Legacy Nutrient Deductions™.
Here are two specific examples:
A rancher in Nebraska purchased high-quality grazing pasture at $2,450 per acre, which included new water systems and good fences. Boa Safra’s soil data and legacy nutrient analysis valued the legacy nutrients at over $900 per acre. By properly deducting legacy nutrients and segregating the costs of water systems and fences, the buyer recovered about half of the total purchase cost through federal tax deductions.
Navigating the complexities of Tax Code Section 180 can unlock significant financial benefits for landowners.
Another example involves a farmer who bought land he had been renting for years. Purchased at market price during a public auction, he recovered 15% of the purchase price through soil nutrient deductions, significantly reducing his income tax burden. Initially, his CPA was concerned about ‘double-dipping’ since the farmer had previously deducted input costs. However, our analysis found that tenants typically do not overspend on fertilizer for rented farms. This farmer used agronomists to apply targeted fertilizer designed for specific crop yields, with crops harvested and removed from the farm. Boa Safra’s hindcasting capabilities confirmed that the legacy nutrient load remained consistent before and after the purchase, validating the deduction.
Final Thoughts
Navigating the complexities of Tax Code Section 180 can unlock significant financial benefits for landowners, especially those looking to optimize their tax position and reinvest in their agricultural future. By leveraging the Legacy Nutrient Deductions™, landowners can tap into a valuable opportunity to enhance profitability and reduce their tax burdens. Whether you’re a farmer or a rancher, taking the time to explore your options with experts like Boa Safra Ag could be the key to discovering untapped savings and maximizing the value of your land investment.