Speaking of all things land, in many cases, land improvements on earth that do not deteriorate over time will be treated as a capital investment and added to the cost base of your land. However, farmers have the opportunity to deduct these expenses as soil and water conservation expenses. Qualifying improvements include things like leveling the land, removing trees and weeds, planting windbreaks, terraces or furrows, and building earthen dams, ditches, diversion channels and ponds. Active farmers can currently deduct the cost of conservation practices implemented as part of a plan approved by NRCS (or similar state-approved).
Farmers can choose the IRC § 175 Soil and Water Conservation Deduction (which is taken in the year in which improvements are made) for conservation expenses in an amount of up to 25 percent of the farmer's gross income from agriculture. The deduction can only be applied for improvements made to “land used for agriculture”. Excess amounts can be carried over to future fiscal years. Once the farmer makes this choice of expenses, it is the only method available to claim land and conservation costs.
If the farmer stops farming or dies before the full cost has been deducted, any unused deduction is lost. It cannot be capitalized to reduce profits from the sale of the farm. Landowners who are not eligible for the deduction must capitalize on expenses (add them to the property base). Recovery of the deduction of expenditure from section 179.Clearance: If the land is cleared to build a building, the CRA dictates that cleaning costs be part of the cost of that asset.
If the compensation is not related to the construction of a building, the costs are part of the adjusted cost base of the land. Other deductible costs you incur for agricultural labor include health insurance, workers' compensation insurance, and other benefits. Tax rules that allow for depreciation of land improvement and amortization of expenses come with some interesting twists in logic. For “compensation”, section 30 allows full cancellation of non-deductible expenses that would otherwise be capitalized on the land cost base.
As an alternative to the landlord paying for the project, the costs could be incurred by the tenant, who would be entitled to work the land rent-free or to a reduced rent rate for a period of years. However, you generally cannot recover other costs until you sell the business or close the deal. These include interest and taxes, the cost of periodically clearing weeds from productive land, regular removal of sediment from a drainage ditch, and expenses paid or incurred primarily to produce an agricultural crop that can also conserve soil. The farmer had purchased a property and had deducted an amount based on his estimate of the fair market value of the existing tile drain, which the previous owner of the land had installed several years earlier.
Prepayment serves a commercial purpose only if you have a reasonable expectation of receiving some commercial benefit by pre-paying the cost of feeding livestock. If you owned the land less than 10 years but more than 5 years, the gain is treated as ordinary income up to a specified percentage of the previous deductions. The election to deduct land clearance expenses provided for in section 182 (a) shall be made by means of a return attached to the taxpayer's income tax return for the tax year for which the election will apply. You can deduct as an expense of the agricultural company real property and personal property taxes on the assets of the agricultural company, such as agricultural equipment, animals, farmland and agricultural buildings.
The method you use must conform to generally accepted accounting principles for similar businesses and should clearly reflect income. While deducting tile drainage instead of claiming CCA at 20 percent simply speeds up the deduction, the tax spread for compensation is more dramatic. I could not deduct it as normal and ordinary agricultural expenditure or depreciate the improvement of agricultural land. While you cannot depreciate land, you can depreciate certain costs incurred in preparing land for commercial use.
Converted wetlands or highly erodible croplands are also land held by anyone whose land base is calculated by reference to the adjusted base of a person in whose hands the property was a converted wetland or highly erodible cropland. . .