What is in this article?:
- Income tax considerations for drought-related sales of livestock
- Election to defer
- The historic drought has forced many more cows than normal to be sold throughout Texas.
- Producers are advised to consult their financial professional for advice that best fits their operation and business plan.
- If weather-related sales cause a producer to sell livestock, the gain on sale can be postponed.
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. “Everybody’s situation is different, and it may not be the best practice to do what your neighbor does,” he said.
Pena mentioned several things to consider for the 2011 tax year. “If weather-related sales cause a producer to sell livestock, the gain on sale can be postponed,” he said. “Two different tax (provisions) 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. 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. 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.”