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IRS.gov Website
Publication 225
taxmap/pubs/p225-019.htm#en_us_publink1000218001

Chapter 5
Soil and Water Conservation Expenses(p28)

taxmap/pubs/p225-019.htm#en_us_publink1000289453Introduction

If you are in the business of farming, you can choose to deduct certain expenses for:
Otherwise, these are capital expenses that must be added to the basis of the land. (See chapter 6 for information on determining basis.) Conservation expenses for land in a foreign country do not qualify for this special treatment.
The deduction for conservation expenses cannot be more than 25% of your gross income from farming. See 25% Limit on Deduction, later.
Although some expenses are not deductible as soil and water conservation expenses, they may be deductible as ordinary and necessary farm expenses. These include interest and taxes, the cost of periodically clearing brush from productive land, the regular removal of sediment from a drainage ditch, and expenses paid or incurred primarily to produce an agricultural crop that may also conserve soil.
You must include in income most government payments for approved conservation practices. However, you can exclude some payments you receive under certain cost-sharing conservation programs. For more information, see Agricultural Program Payments in chapter 3.
Where Refund
To get the full deduction to which you are entitled, you should maintain your records to clearly distinguish between your ordinary and necessary farm business expenses and your soil and water conservation expenses.
taxmap/pubs/p225-019.htm#en_us_publink1000218005

Business of Farming(p29)

rule
For purposes of soil and water conservation expenses, you are in the business of farming if you cultivate, operate, or manage a farm for profit, either as an owner or a tenant. You are not in the business of farming if you cultivate or operate a farm for recreation or pleasure, rather than for profit. You are not farming if you are engaged only in forestry or the growing of timber.
taxmap/pubs/p225-019.htm#en_us_publink1000218006

Farm defined.(p29)

rule
A farm includes livestock, dairy, poultry, fish, fruit, and truck farms. It also includes plantations, ranches, ranges, and orchards. A fish farm is an area where fish and other marine animals are grown or raised and artificially fed, protected, etc. It does not include an area where they are merely caught or harvested. A plant nursery is a farm for purposes of deducting soil and water conservation expenses.
taxmap/pubs/p225-019.htm#en_us_publink1000218007

Farm rental.(p29)

rule
If you own a farm and receive farm rental payments based on farm production, either in cash or crop shares, you are in the business of farming. If you get cash rental for a farm you own that is not used in farm production, you cannot deduct soil and water conservation expenses for that farm.
If you receive a fixed rental payment that is not based on farm production, you are in the business of farming only if you materially participate in operating or managing the farm.
taxmap/pubs/p225-019.htm#en_us_publink1000218008

Example.(p29)

You own a farm in Iowa and live in California. You rent the farm for $175 in cash per acre and do not materially participate in producing or managing production of the crops grown on the farm. You cannot deduct your soil conservation expenses for this farm. You must capitalize the expenses and add them to the basis of the land.
For more information, see Material participation for landlords under Landlord Participation in Farming in chapter 12.