25% Limit on Deduction

The total deduction for conservation expenses in any tax year is limited to 25% of your gross income from farming for that year. For farming partnerships and S corporations, this is applied to each partner or shareholder.

Gross income from farming. Gross income from farming is the income you derive in the business of farming from the production of crops, fish, fruits, other agricultural products, or livestock. Gains from sales of draft, breeding, or dairy livestock are included. Gains from sales of assets such as farm machinery, or from the disposition of land, are not included.

Example. In 2025, you report gross income from farming for your single-member LLC (SMLLC) on Schedule F (Form 1040) of $85,000. Additionally, your gain from sales of cull raised breeding animals reported on Form 4797, line 2(g), is $15,000. Therefore, your gross income from farming is $100,000 ($85,000 + $15,000). Thus, the applicable 25% limitation ($100,000 x 25% (0.25)) is $25,000 for soil and water expenses in 2025.

The calculation of farm income for soil

TIP and water conservation expenses dif-

fers from the calculations for income averaging and estimated tax payments. For more information, see Income Averaging for Farmers in chapter 3 and Gross Income in chapter 15 .

Carryover of deduction. If your deductible conservation expenses in any year are more than 25% of your gross income from farming for that year, you can carry the unused deduction over to later years. However, the deduction in any later year is limited to 25% of the gross income from farming for that year as well.

Example. In 2025, you have gross income of $32,000. During the year, you incurred $10,000 of deductible soil and water conservation expenses. However, your deduction is limited to 25% of $32,000, or $8,000. The $2,000 excess ($10,000 − $8,000) is carried over to 2026 and added to deductible soil and water conservation expenses made in that year. The total of the 2025 carryover plus 2026 expenses is deductible in 2026, subject to the limit of 25% of your gross income from farming in 2026. Any expenses over the limit in that year are carried to 2027 and later years.

Net operating loss (NOL). The deduction for soil and water conservation expenses, after applying the 25% limit, is included when figuring

an NOL for the year. If the NOL is carried to another year, the soil and water conservation deduction included in the NOL is not subject to the 25% limit in the year to which it is carried.