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Monday, January 02, 2012

Get Ready For Income Taxes:  Part 5


The extreme weather of 2011 created havoc for livestock producers as well as grain producers.  If pasture and rangeland along major rivers was not flooded, it was decimated by drought.  As a result many livestock producers were faced with early liquidation of livestock, and that produced potential tax consequences.  Such unplanned early sales can throw more income into one year than usual, but the Internal Revenue Service seems to understand such abnormalities, and allows a “mulligan” from time to time.

If your pasture or rangeland was not flooded, it was parched, and there was very little in between for tax year 2011.  Feeder calves went to feedlots earlier than scheduled because of the lack of forage. And when the Missouri, Mississippi, Ohio, and many other rivers in the Cornbelt and Great Plains decided to escape and explore new territory, livestock had little to graze on.  Many of them went to market for lack of feed as well.

Purdue University tax specialist George Patrick says weather-related sales of livestock can be cushioned with provisions authorized by the Internal Revenue Service.  In his annual tax guide to farmers Patrick says the livestock sold for weather purposes can fall into two categories.
1) Livestock held for draft, breeding or dairy purposes and sold because of weather-related conditions are provided a two-year reinvestment period under the first provision.
2) The second provision, which applies to all livestock (other than poultry), allows cash basis taxpayers whose primary trade or business is farming a deferral of receipts from sales in excess of normal business practice because of weather-related conditions resulting in a disaster area declaration.

If the sale of livestock from your operation was outside your normal business practice, then one of the provisions may help many producers which sustained loss of pasture or rangeland during 2011. 

If your livestock were part of a long term enterprise, such as breeding stock, draft horses, or dairy operations, and had to be sold, then you would have received income from the sale.  However, that income does not have to be reported, if it is reinvested within a two year period to purchase replacement animals.  In this situation a disaster declaration by the state or federal government or the USDA is not required; however keep your proof of the problem to show an auditor should the IRS question your records.  That could be pictures of flooded pastureland, drought devastated rangeland, or loss of feed that caused more livestock to be sold than would normally have been sold.  There would be a red flag if you replaced a dairy herd with draft horses.

Patrick uses the example of beef cattle being sold, to demonstrate the tax basis that would be subject to income tax when the final transaction is in place:

A producer’s tax basis in the replacement livestock equal to the basis in the livestock sold plus any additional amount invested in the replacement livestock that exceeds the proceeds from the sale. For example, a producer sells 20 raised beef cows (with a $0 tax basis) for $500 each. The gain of $7,500 (15 cows sold in excess of normal business practice X $500) is deferred. If the producer purchased 15 cows in 2013 for $600 each, the tax basis in the replacement animals would be $100 (the $600 cost minus the $500 proceeds from sale). 

For protection, keep detailed records of the sale of the initial livestock and the purchase of the replacement livestock.

The other instance involves the sale of livestock without replacement, and a disaster declaration is required for the IRS to allow the producer to defer reporting the income for one year, and not have to pay tax or self employment tax on the income from the sale of the animals.  Patrick says the sale can occur before or after the disaster declaration, but must be a sale that includes more than the normal business practice.  Again, detailed records must be kept and attached to the tax return, showing the change from normal practice and the reasons for the change.  And in a year such as 2011, it is not too difficult to demonstrate that the actions you took were abnormal, yet justifiable.

The sale of livestock which was forced by inclement weather can receive special treatment by the IRS for income reporting purposes.  If livestock were sold because of poor pasture or lack of feed, income reporting can be deferred for a year under two circumstances.  In one case, where there is no disaster declaration, dairy cattle, breeding stock, or draft animals can be sold but not replaced for two years without a tax penalty.  If livestock are sold because of lack of feed and a disaster was declared, then income can be deferred up to a year without a penalty.

Posted by Stu Ellis on 01/02 at 11:15 PM | Permalink

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