! conservation expenses, you must in

CAUTION clude as gross income any cost-shar-

ing payments you receive for those expenses. See chapter 3 for information about payments eligible for the cost-sharing exclusion.

New farm or farmland. If you acquire a new farm or new farmland 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 or incurred. 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 doesn’t

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, you can deduct your conservation expenses.

Land not used for farming. If your conservation expenses benefit both land that doesn’t qualify as land used for farming and land that does qualify, you must allocate the expenses between the two types of land. Land that doesn’t qualify as land used for farming would include uncultivated land, which would need to be developed for farming. Because the land is not used in farming during the time that developmental expenditures are made, no deduction for soil and water conservation expenses is available under section 175. For example, if the expenses benefit 200 acres of your land, but only 120 acres of this land are used for farming, then you can deduct 60% (120 ÷ 200) of the expenses. You can use another method to allocate these expenses if you can clearly show that your method is more reasonable.

Depreciable conservation assets. You generally can’t deduct your expenses for depreciable conservation assets. However, you can deduct certain amounts you pay or incur for an assessment for depreciable property that a soil and water conservation or drainage district levies against your farm. See Assessment for De- preciable Property, later.

You must capitalize expenses to buy, build, install, or improve depreciable structures or facilities. These expenses include those for materials, tile (including drainage tile), pipe, pumps (and other equipment), supplies, wages, fuel, hauling, and moving dirt when making or installing structures such as tanks, reservoirs, culverts, canals, dams, drainage systems, waste management systems or wells composed of masonry, concrete, tile (including drainage tile), metal, or wood. You recover your capital investment through annual allowances for depreciation.

You can deduct soil and water conservation expenses for nondepreciable earthen items. Nondepreciable earthen items include certain dams, ponds, and terraces described under Property Having a Determinable Useful Life in chapter 7.

Water well. You can’t deduct the cost of drilling a water well for irrigation and other agricultural purposes as a soil and water conservation expense. It is a capital 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 constitutes an abandonment.

30 Chapter 5 Soil and Water Conservation Expenses Publication 225 (2025)

Table 5-1.

Limits on Deducting an Assessment by a Conservation District for Depreciable Property

Total Limit on Deduction for Assessment for Depreciable Property	Yearly Limit on Deduction for Assessment for Depreciable Property	Yearly Limit for All Conservation Expenses
10% of:	$500 + 10% of:	25% of:
Total assessment against all members of the district for the property.	Your deductible share of the cost to the district for the property.	Your gross income from farming.
• No one taxpayer can deduct more than 10% of the total assessment. • Any amount over 10% is a capital expense and is added to the basis of your land. • If an assessment is paid in installments, each payment must be prorated between the conservation expense and the capital expense.	• If the amount you pay or incur for any year is more than the limit, you can deduct for that year only 10% of your deductible share of the cost. • You can deduct the remainder in equal amounts over the next 9 tax years.	• Limit for all conservation expenses, including assessments for depreciable property. • Amounts greater than 25% can be carried to the following year and added to that year’s expenses. The total is then subject to the 25% of gross income from farming limit in that year.

Endangered species recovery expenses. After 2008, taxpayers engaged in the trade or business of farming are allowed to deduct qualifying expenditures under section 175 for endangered species recovery. Expenditures must be for a qualifying purpose under an approved recovery plan and would generally include expenditures designed to recover listed species and ecosystems on which they depend to levels where protection is no longer needed. Otherwise, these are capital expenses that must be added to the basis of the land.

Expenditures don’t need to be paid or incurred with respect to land used in farming. However, the expenses must be paid or incurred for the purpose of achieving site-specific management actions recommended in a recovery plan approved under section 4(f) of the Endangered Species Act (ESA) of 1973 for the area in which the land is located. For applicable expenditures, determine which part of your land is in an ESA recovery zone and what the applicable recovery plans require. See section 175 for more information.