Income tax considerations for drought-related sales of livestock
By Blair Fannin
COLLEGE STATION -- Ranchers across Texas have been forced to sell cattle at a historic rate and income tax implications are a concern, according to Texas AgriLife Extension Service economists.
“The historic drought has forced many more cows than normal to be sold throughout Texas,” said Dr. David Anderson, AgriLife Extension livestock economist. “Of the $5.2 billion in agricultural losses to date, $2.06 billion has come from our livestock industry, as ranchers have 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 are advised to consult their financial professional for advice that best fits their operation and business plan, said Jose Pena, AgriLife Extension economist.
Pena said there are things to consider looking ahead for the 2011 tax year.
“If weather-related sales cause a producer to sell livestock, the gain on sale can be postponed,” Pena said. “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, Pena said. The second applies to all livestock and allows a one-year postponement of the reporting of the sales 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,” Pena said.
The replacement livestock must be used for the same purpose as the livestock that was sold, he said. For example, dairy cows must be replaced with dairy cows. The taxpayer must show that the weather-related conditions caused the sale of more livestock than would have been sold without the drought conditions.
“For example, if the farmer normally sells one-fifth of the herd each year, only the sales in excess of one-fifth will qualify for this provision,” he said. “There is no requirement that the weather-related conditions cause an area to be declared a disaster area by the federal government.”
Pena said 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 the weather-related conditions, the computation of the amount of the gain realized on the sale or exchange, the number and kind of livestock sold or exchanged, and the number of livestock each kind that would have been sold or exchanged under the usual business practice in the absence of the weather-related condition.”
Another scenario involves sales of livestock inventory. Pena said if inventory of livestock (calves, stockers, etc.) are sold because of weather-related conditions, the taxpayer may postpone reporting of the income for one year.
“To qualify for this election, the taxpayer must show that his/her principal business is from farming or ranching; use the cash method of accounting; show 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 declaration or contiguous county) officially declared as a disaster area. 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 of income that can be postponed is the income generated from the excess amount of livestock sold as a result of weather-related causes, Pena said.
“For example, if a rancher sells 150 head of livestock due to weather-related causes instead of a usual average of 100 head, the income generated from the sale of the extra 50 head may be postponed to the following year,” he said.
Blair Fannin is a communications specialist with Texas AgriLife Research.