IRS Informs North Dakota of Extended Period for Livestock Rollover

Published on: 13:35PM Aug 04, 2017

IRS Commissioner John Koskinen wrote a letter to Senator Heidi Heithamp of North Dakota on July 26, 2017.  He indicated that due to the drought, cattle ranchers affected by the drought and required to sell excess cattle had an extra two years to purchase additional cattle to defer the gain.

Under Section 1033, ranchers are allowed to defer the gain from selling excess cattle due to drought.  Taxpayers normally have two years to purchase cattle to defer the gain.  However, if the area is designated as eligible for federal government assistance because of the drought, the deferral period is extended to four years.

This deferral only applies to "extra" livestock that are sold.  For example, if your average sales over the last three years is 125 head and you sell 175 head due to drought, you are allowed to defer the gain on 50 head.

If the area continues to be designated as being in drought (the IRS issues a notice each September indicating those counties), then you can continue to defer your gain.  However, if you do not purchase the required cattle during this deferral period, you are required to go back to the original year, pay the tax plus interest.

There are many cases where it would not make sense to defer the gain.  In many cases, the sale of this cattle would be at capital gains rates which are lower than regular rates and any investment in breeding stock or farm equipment would allow you to deduct it at ordinary income rates.  Let's look at an example:

Rancher James is required to sell an extra 100 head for $150,000 due to drought.  All of this cattle was raised breeding stock.  He generates $350,000 of net farm income during the year before the purchase of $150,000 of breeding stock before year-end.  If he elects to rollover the proceeds into his new breeding stock, the basis in the new herd is zero and he will pay tax on $350,000 of net farm income.  However, if he reports the gain on the herd and pays tax at 15% ($22,500 of tax) and elects to take Section 179 on the breeding herd, this will reduce his tax by $49,500 ($150,000 times 33%).  Overall, his tax bill goes down by $27,000 by not making the election to defer the excess sales under Section 1033.

There is also an election under Section 451 to simply defer reporting the gain for one year.  Each situation is different.  Perhaps the farmer has a loss for the year and would like to carry the loss back five years to pick up tax paid then.  In that case, making the election may be prudent.

If you are in this situation, it would be good to meet with your tax advisor now to determine the best strategy.