By Blair Fannin
Tax concerns for drought-related sales of livestock
Ranchers across the Southwest have been forced to sell cattle at historic rates, creating concerns about income tax implications.
"The drought has forced many more cows than normal to be sold," says David Anderson, a Texas Agri-Life Extension livestock economist. "Of the $5.2 billion in agricultural losses to date, $2.06 billion has come from our livestock industry as ranchers sold off cattle due to lack of forage and escalating supplemental feed expenses. This has created several financial management issues for cattle producers to consider."
Producers should consult their financial professional for advice that best fits their operation and business plan, says Texas AgriLife Extension economist Jose Peña.
Tax Considerations for 2011. "If weather-related sales cause a producer to sell livestock, the gain on sale can be postponed," Peña says. "There are two different tax treatments, both of which apply only to weather-related sales in excess of normal business practice."
The first treatment applies to draft, breeding or dairy animals that will be replaced within a two-year period, Peña says. The second applies to all livestock and allows a one-year postponement of the reporting of the sale proceeds.
"If livestock [other than poultry] held for any length of time for draft, breeding or dairy purposes is sold because of weather-related conditions, the gain realized on the sale does not have to be recognized if the proceeds are used to purchase replacement livestock within two years of the end of the tax year of the sale," Peña says.
The replacement livestock must be used for the same purpose as the livestock sold—dairy cows must replace dairy cows, etc. The taxpayer must show that the weather conditions caused the sale of more livestock than normal.
"For example, if the farmer normally sells one-fifth of the herd each year, only the sales in excess of one-fifth will qualify," Peña says. "There is no requirement that an area be declared a disaster area by the federal government."
The election to defer the recognition of gain is made by not reporting the deferred gain on the tax return.
"A statement should be attached to the tax return indicating the existence of weather-related conditions, the amount of the gain realized on the sale or exchange, the number and kind of livestock, and the number of livestock that would have been sold or exchanged under usual business practice," Peña says.
Another scenario is to postpone reporting sales of livestock inventory (calves, stockers, etc.) due to weather-related conditions for one year.
"To qualify, you must show that your principal business is from farming or ranching; that you use the cash method of accounting; that the livestock would normally have been sold in a subsequent year; and that the sale of livestock was caused by weather conditions from an area [county or contiguous county] officially declared as a disaster area," Peña says. "The sale can take place before or after an area is declared a disaster area as long as the same disaster caused the sale."
The amount that can be postponed is the income from the excess amount of livestock sold as a result of weather-related causes, Peña says.
"For example, if a rancher sells 150 head of livestock due to weather-related causes instead of his usual 100 head, the income from the extra 50 head may be postponed to the following year," he says.
Blair Fannin works for Texas A&M AgriLife Extension.
- December 2011