IRS Cost in Water Depletion Program
Landowners in the Southern High Plains of Texas who use groundwater from the Ogallala Aquifer for irrigation farming may claim a cost in water depletion allowance on their federal income tax return. The District has offered this service since 1999.
The program benefits irrigated landowners affected by declining water levels. The tax benefit an irrigated landowner receives from this decline is based on two factors: 1) the saturated thickness of the aquifer underlying their property at the time of acquisition, and 2) the cost of the land attributable to water.
In order to participate, the District must follow the strict guidelines of the Internal Revenue Service. Eligible properties, within the South Plains Water District, are those which have been acquired since 1979. This date of acquisition was set by the IRS after evaluating District records pertaining to water level measurements and land sales.
Each December, the District creates a water table decline map. The District also contracts the services of a certified land appraiser who collects land sales data. The sales data helps establish the cost of water for each year.
The economic benefits of this program may be especially helpful to landowners affected by both declining water levels and low commodity prices. When qualified landowners receive this tax benefit, they are also reminded of the ever present need for continued conservation.
(Depletion Information Form.pdf)
PLEASE SEEK THE ADVICE OF YOUR TAX ADVISOR FOR DETAILS FOR FILING CLAIMS.
IRS Publication 225 (2016) Farmer's Tax Guide
Cost depletion for ground water in Ogallala Formation. Farmers who extract ground water from the Ogallala Formation for irrigation are allowed cost depletion. Cost depletion is allowed when it can be demonstrated the ground water is being depleted and the rate of recharge is so low that, once extracted, the water is lost to the taxpayer and immediately succeeding generations.
To figure your cost depletion deduction, use the guidance provided in Revenue Procedure 66-11 in Cumulative Bulletin 1966-1.