Section 175: Soil and Water Conservation Deduction, Cap, and Recapture

The Section 175 soil and water conservation deduction lets farmers and ranchers write off qualifying conservation costs in the year they pay them instead of capitalizing those costs over the life of the improvement. The deduction is capped each year at 25 percent of your gross farming income, with anything over the cap carrying forward indefinitely.¹ Two conditions do most of the work: the spending has to follow a conservation plan approved by the Natural Resources Conservation Service (or a comparable state agency), and the land has to already be in farming use. Sell that land within ten years and part of what you deducted comes back as ordinary income.

Who Can Claim It

You have to be in the business of farming for profit. That covers anyone who cultivates, operates, or manages a farm, ranch, orchard, or similar operation as owner or tenant.² Hobby farms are out. A landlord who takes cash rent and stays hands-off is also out.

A landlord can qualify if they materially participate in the farming operation. The IRS uses several tests, including working more than 500 hours in the activity during the year, or providing substantially all of the participation among everyone involved. Retired and disabled farmers get a break: if you materially participated in farming for at least five of the eight years before retirement or disability, you’re still treated as a material participant.³

What Land the Deduction Covers

The land must be used for producing crops, fruits, fish, other agricultural products, or sustaining livestock, including grazing. It has to be in farming use, or have been used for farming in the past, at the time you incur the conservation costs. Raw, never-farmed land you’re converting to agriculture for the first time doesn’t qualify.⁴

If you buy land from someone who was actively farming it, your use counts as farming as long as it substantially continues the prior owner’s agricultural use. It doesn’t have to be the same type of farming. Switching from row crops to livestock grazing still qualifies.⁴

What Costs Qualify

Every eligible expenditure must be consistent with a conservation plan approved by the Natural Resources Conservation Service (part of the USDA). If no NRCS plan covers your area, a plan from a comparable state agency works. Without an approved plan on file, there is no deduction.¹

Eligible work is essentially earthwork and erosion control tied to the land itself: leveling, grading, terracing, contour furrowing, building diversion channels, drainage ditches, earthen dams, watercourses, outlets, and ponds, clearing brush, and planting windbreaks.¹

Section 175 also covers site-specific management actions recommended in a recovery plan approved under the Endangered Species Act. Habitat restoration, reseeding with native grasses, and similar work qualify when they track a federally approved recovery plan, not just any wildlife project on the property.¹

What Is Excluded

The deduction is limited to nondepreciable improvements. Anything that would be depreciated under Section 167 has to be recovered through depreciation instead. Concrete dams, irrigation pipes, well casings, pumps, tile conduits, metal tanks, and machinery are all outside Section 175, even when they serve a conservation purpose.⁵ An earthen dam can qualify; a concrete one has to be depreciated.

Two activities are barred outright regardless of any conservation rationale: draining or filling wetlands, and preparing land for center pivot irrigation systems.¹

Costs already deductible under another Code section are also excluded. If an expense qualifies as an ordinary and necessary business expense under Section 162, you don’t need Section 175 for it. The provision exists for costs you would otherwise have to capitalize.

The 25 Percent Cap and Carryover

Your total Section 175 deduction in a tax year cannot exceed 25 percent of your gross income from farming for that year.¹ Gross farming income means revenue from producing crops, fruits, fish, other agricultural products, and livestock (including animals held for draft, breeding, or dairy purposes) across all your agricultural land, not just the parcel where conservation work happens. It does not include gains from selling farm machinery or land.⁶

A farmer with $100,000 in gross crop and livestock revenue can deduct up to $25,000 in conservation expenditures for that year. If she spent $40,000 on qualifying work, the remaining $15,000 carries into the next year, gets added to any new conservation spending, and is tested again against 25 percent of that year’s gross farming income.¹ The carryover lasts for the taxpayer’s entire existence, so a multi-year project eventually gets fully deducted even if a single year’s cap bites hard.

For farming partnerships, the 25 percent cap applies at the partner level, not at the partnership. Each partner runs the limit against their own gross farming income, and any carryover belongs to the partner personally.⁶ Partners with different income levels hit the cap at different points even when their share of the partnership’s conservation spending is identical.

Conservation District Assessments

If a soil or water conservation district assesses your land, the portion of the assessment that would have been deductible under Section 175 if you’d paid for the work directly gets the same treatment. Timing is keyed to when you pay the assessment, not when the district does the work.⁵

A special rule kicks in when the district uses assessment funds to acquire depreciable property such as concrete structures or pumping equipment. You can still deduct your share of that portion, but only up to 10 percent of the total assessment levied on all district members for that depreciable property. If your payment exceeds the 10 percent threshold by more than $500, the entire excess is spread ratably over the following nine tax years instead of being deducted right away.¹

Recapture If You Sell Within Ten Years

Sell farm land within ten years of buying it after claiming Section 175 deductions and part of those deductions is recaptured as ordinary income under Section 1252. The recapture equals the lesser of the applicable percentage of your total Section 175 deductions or the gain on the sale.⁷

The percentage steps down with time held:

Fewer than 5 years: 100 percent
Sixth year: 80 percent
Seventh year: 60 percent
Eighth year: 40 percent
Ninth year: 20 percent
10 years or more: zero

Ordinary rates are higher than long-term capital gains rates, so a sale inside the recapture window can undo much of what the immediate deduction saved. If you already know you’ll sell within a decade, run that math before electing.

Making the Election

Section 175 requires an affirmative election. In the first year you incur qualifying expenditures, you elect simply by claiming the deduction on a timely return (including extensions). Sole proprietors report it on Schedule F (Form 1040), Profit or Loss From Farming.⁸

Once made, the election applies to all qualifying expenditures in the current and every future tax year. Switching back to capitalizing these costs requires written consent from the IRS.⁹ Adopting the method for a later year, if you didn’t elect in your first qualifying year, also requires IRS consent.

Records to Keep

Keep the NRCS-approved plan (or state agency plan) with your permanent tax records. The IRS expects documentation that clearly separates ordinary farm business expenses from Section 175 conservation expenses, because the 25 percent cap and the recapture rules apply only to the conservation spending.⁸ Mixing the two on your return invites questions you’d rather not answer.

1
Office of the Law Revision Counsel. 26 USC 175 Soil and Water Conservation Expenditures; Endangered Species Recovery Expenditures
2
eCFR. 26 CFR 1.175-1 Soil and Water Conservation Expenditures; In General
3
Internal Revenue Service. Publication 925 Passive Activity and At-Risk Rules
4
eCFR. 26 CFR 1.175-4 Definition of Land Used in Farming
5
eCFR. 26 CFR 1.175-2 Definition of Soil and Water Conservation Expenditures
6
eCFR. 26 CFR 1.175-5 Percentage Limitation and Carryover
7
Office of the Law Revision Counsel. 26 USC 1252 Gain From Disposition of Farm Land
8
Internal Revenue Service. Publication 225 (2025) Farmers Tax Guide
9
eCFR. 26 CFR 1.175-6 Adoption or Change of Method