Resources
Explore the legal, scientific, and financial foundation of the water depletion deduction — including IRS guidance, valuation methodology, and downloadable resources.
Farm Advisors Whitepaper
Whitepaper: Water Depletion & Tax Deductions: A Guide for Tax Professionals
Our flagship publication for tax professionals and landowners. It explains the deduction’s legal foundation, scientific basis, and valuation methodology.
IRS Authorities
Grounded in IRS-recognized guidance. Key authorities include:
Internal Revenue Code §611 – Deduction for depletion of natural resources, including groundwater.
Authorizes cost depletion for capitalized water resources consumed during farming operations.
United States v. Shurbet (347 F.2d 103 (5th Cir. 1965) – Landmark case establishing groundwater as a depletable asset under federal tax law.
Recognizes that water may be depreciated as part of land with a determinable depletable supply.
Revenue Ruling 65-296 (1965)– IRS acceptance of groundwater depreciation when capitalized in farmland.
Affirms that a portion of land cost attributable to groundwater may be recovered through depletion.
Revenue Procedure 66-11 (1966) – Provides IRS examiners with procedures for calculating depletion on depletable resources.
Applies to groundwater when basis and depletion are properly substantiated.
Revenue Ruling 82-214 (1982) – Clarifies geographic applicability of water depletion beyond the Southern High Plains.
Extends availability of groundwater depletion deduction to any region with measurable depletion, including the Ogallala Aquifer.
IRS Publication 225 (Farmer’s Tax Guide; 2024) – Farmer’s Tax Guide; affirms deductibility of groundwater depletion when IRS criteria are met.
Provides practical guidance on depletion claims under IRC §611 for farmers.
Tax Filing Links & Forms
Tools commonly used when claiming or adjusting the deduction:
Form 3115 – Application for Change in Accounting Method
Used to claim a “catch-up” deduction when groundwater depletion was not recognized in earlier years — especially when the land was acquired more than 3–4 years ago and amending past returns is no longer practical.
This method allows taxpayers to recover prior depletion in the current year without reopening old returns, under IRC §481(a).
Filing Forms for Retroactive Deductions: Depending on your entity type, different forms are used to apply the deduction retroactively, if the land transfer occurred within the past 3 years:
Form 1040X – Amended U.S. Individual Income Tax Return
Form 1120X – Amended U.S. Corporation Income Tax Return (for C Corps)
Form 1065 with amended K-1s – For partnerships and LLCs taxed as partnerships
Form 1120-S with amended K-1s – For S Corporations
Form 1041 – For farmland held in trust or passed through an estate.
Amended returns are filed by re-submitting Form 1041 and marking it as “Amended.”
IRS Publication 225 (Farmer’s Tax Guide; 2024)
○ Covers depreciation, cost depletion under §611, and rules related to natural resource recovery.
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