Short answer: Section 180 is a tax deduction, not a tax credit.

This is one of the most common questions we receive from farmland buyers, and agricultural professionals. While both tax credits and tax deductions can reduce your tax bill, they work very differently.

Understanding the distinction is critical when evaluating the value of a Section 180 soil fertility deduction.

What Is the Difference Between a Tax Credit and a Tax Deduction?

Although they’re often confused, tax credits and tax deductions reduce taxes in different ways.

Tax Deduction

A tax deduction reduces your taxable income.

Instead of reducing your tax bill dollar-for-dollar, it lowers the amount of income that is subject to tax.

For example:

• Taxable income: $1,000,000
• Section 180 deduction: $200,000
• New taxable income: $800,000

You now pay income tax on $800,000 instead of $1,000,000.

The actual tax savings depend on your marginal tax rate.

If your combined federal and state tax rate is 35%, a $200,000 deduction could reduce your taxes by approximately $70,000.

Tax Credit

A tax credit directly reduces the amount of tax you owe.

For example:

• Tax owed: $100,000
• Tax credit: $10,000
• New tax owed: $90,000

Unlike deductions, credits generally provide the same dollar-for-dollar benefit regardless of your tax bracket.

Why Section 180 Is a Tax Deduction

Internal Revenue Code Section 180 allows qualifying taxpayers to deduct certain expenditures for fertilizer, lime, and other materials used to improve farmland.

When a farm is purchased with existing residual soil fertility, a properly supported valuation may identify the portion of the purchase price attributable to those soil fertility assets. Subject to applicable tax law and professional advice, that amount may qualify as a Section 180 deduction rather than being capitalized into the land.

The key point is simple:

Section 180 reduces taxable income. It does not create a tax credit.

Why People Sometimes Think It’s a Tax Credit

Many landowners notice that their tax bill decreases significantly after claiming a Section 180 deduction.

Because they see a lower tax bill, they assume they received a tax credit.

In reality, the deduction reduced their taxable income, which then reduced the taxes calculated on that income.

The distinction matters because:

• The value of a deduction depends on your tax bracket.
• Higher-income taxpayers often receive larger tax savings from the same deduction.
• A deduction is calculated differently than a credit on a tax return.

Example: Tax Credit vs. Section 180 Deduction

Suppose a farmland buyer has:

• Taxable income before Section 180: $900,000
• Combined marginal tax rate: 37%
• Qualified Section 180 deduction: $250,000

If it were a tax credit

The buyer’s tax bill would decrease by $250,000.

Because it is a tax deduction

Taxable income becomes:

$900,000 − $250,000 = $650,000

Estimated tax savings:

$250,000 × 37% = $92,500

While the deduction does not save the full $250,000 in taxes, it can still produce substantial tax savings.

Does That Make Section 180 Less Valuable?

Not at all.

Large deductions can produce significant after-tax savings, especially for taxpayers in higher federal and state tax brackets.

For many agricultural land purchases, a properly documented Section 180 deduction may represent one of the largest immediate tax planning opportunities associated with the acquisition.

Every situation is different, however. Eligibility, timing, and tax impact depend on the specific facts, the condition of the property at purchase, and the taxpayer’s individual circumstances.

How Is the Deduction Determined?

A credible Section 180 analysis is based on agronomic evidence, not estimates.

A professional evaluation generally includes:

• Soil sampling performed on the purchased property
• Laboratory analysis
• Agronomic interpretation
• Determination of nutrient levels
• Comparison to agronomic fertility targets
• Valuation of excess soil fertility using supportable methodology

Without measuring the soil, there is no objective way to determine the quantity or value of residual fertility present at the time of purchase.