If you are in the business of farming, you can choose to currently deduct your expenses for soil or water conservation or for the prevention of erosion of land used in farming. Otherwise, these are capital expenses that must be added to the basis of the land. Conservation expenses for land in a foreign country do not qualify for this special treatment. The deduction cannot be more than 25% of your gross income from farming.
You can deduct your expenses for soil and water conservation only if they are consistent with a plan approved by the Natural Resources Conservation Service (NRCS) of the Department of Agriculture. If no such plan exists, the expenses must be consistent with a soil conservation plan of a comparable state agency to be deductible. Keep a copy of the plan with your books and records as part of the support for your deductions.
Choosing To Deduct
You can choose to deduct soil and water conservation expenses on your tax return for the first year you pay or incur these expenses. If you choose to deduct them, you must deduct the total allowable amount in the year they are paid or incurred. If you do not deduct the expenses, you must capitalize them.
Note: If you receive cash rental for a farm you own that is not used in farm production, you can not claim soil and water conservation expenses for that farm. These costs must be capitalized into the land basis.
You own a farm in Iowa and live in California. You rent the farm for $125 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.