As drought continues to hit many parts of the us, more and more ranchers and other livestock producers are forced to liquidate part of their herd due to limited feed supplies. If these sales exceed normal sales, the tax rules allow you to elect to defer these excess sales (but only the excess).
In general, you have two options. You can either elect to defer the excess sales for one year (similar to crop insurance proceeds) or you can elect to defer and roll over into purchase of replacement livestock. in some cases, if the drought continues, this deferral period can last for several years. At a minimum it is two year after the current year.
The “normal” amount that you can defer is based on the average cattle sold during the last three years compared to the number of cattle sold in the current year. You then take the excess head sold and multiply it by the average sales price to arrive at the excess dollars to be deferred.
As an example, assume Sue sells an average of 1,000 head in 2019-2021 and in 2022 she has to sell 1,500 head at an average sales price of $1,500. The amount that she can defer is $750,000 (500 excess head multiplied by $1,500).
There are many reasons why you may want to not defer. If the deferral is comprised of mostly raised breeding stock that qualifies for capital gain treatment, it is almost always better to report the sales and then take a deduction for replacement breeding stock since that will reduce ordinary income and self-employment income, if applicable.
Also, breeding stock sales are not subject to SE tax, while the purchase will reduce SE income.
If you are facing this type of drought situation, it is wise to review your options with your advisor before you make major sales. Knowing your deferral options may save you some taxes.
