Cost-in-Water Income Tax Depletion Allowance

title taxLandowners within the High Plains Water District service area who utilize groundwater produced from the Ogallala Formation in the business of irrigated farming may claim a cost-in-water income tax depletion allowance on their federal income tax return. This allowance is permitted under strict guidelines of the Internal Revenue Service.

In 1962, the High Plains Underground Water Conservation District No. 1 initiated a lawsuit against the U.S. Treasury/Internal Revenue Service for a tax credit for the depletion of groundwater used in irrigated farming.

The lawsuit was filed by Marvin and Mildred Shurbet, who owned land in Floyd County, Texas. The High Plains Water District developed and organized data for the trial, paid for the expert witnesses and legal fees, as well as other costs associated with the trial.

Landowners within the High Plains Water District service area who utilize groundwater produced from the Ogallala Formation in the business of irrigation farming may claim a cost-in-water income tax depletion allowance on their federal income tax return. This allowance is permitted under strict guidelines of the Internal Revenue Service.

The allowance requires that the taxpayer must have paid more for a tract of land because it had groundwater in storage beneath it as compared to a similar tract of land in the same area with little or no groundwater in storage.

The allowance is based on annual depreciation of the initial extra cost of groundwater that was part of the total purchase price of a tract of land. The total value of improvements to the property must be subtracted from the total cost of the land and the IRS approved county average value of dryland property for the year of property acquisition must also be subtracted from the total purchase price of the property to derive the groundwater cost. The derived groundwater cost is the value subject to depreciation and a principal element of the depletion allowance determination.

The allowable annual depreciation is directly related to the Internal Revenue Service approved annual decline in water levels for individual tracts of land. These decline values are derived from measured changes in water levels in a select network of observation wells located within the Water District's 16-county service area.

The Water District contracts with a professional land appraiser who documents land sales in portions of the district each year. An average per-acre sales value for dryland and irrigated land is determined. Internal Revenue Service engineers meet with District officials each year and "cost-in-water" guidelines are developed for each county. These annual guidelines are valid for use only for those land acquisitions that occur during a sales study year.

The Water District charges a $50 fee for the basic information to establish a claim, including saturated thickness and annual decline for up to three prior years and cost-in-water sales data for the year of land acquisition. Each year following the initial set-up, the Water District charges a $10 fee for decline data, if a decline occurs. If there is no decline, no fee is charged.

In addition to the money saved, we believe this program provides landowners with an annual water "bank statement" which reminds them that their groundwater reserves are being depleted. As a result, many landowners have implemented better water conservation practices on their farms.

For more information, contact Keith Whitworth at kwhit@hpwd.com

If this is your initial request, download the cost-in-water income tax depletion allowance form here.

If you have previously requested this service, download the reorder request form here.

PLEASE SEEK THE ADVICE OF YOUR TAX ADVISOR FOR DETAILS FOR FILING CLAIMS.