| MMM 377 | August 24, 1998 |
Droughts can wreak havoc on families that produce beef cattle.
The good news is that at tax time, you may have some options that
might make things easier. If you were forced to sell beef cattle
because of the drought, you may be able to postpone reporting
gains on the sale.
Two tax provisions apply to the sale of livestock because of
drought. One allows the taxpayer to roll the gain into the basis
of the replacement livestock. The other allows the taxpayer to
defer reporting the income by one year.
The election to either roll over the gain or defer it to the next tax year is fairly simple. It is made by not reporting the deferred gain on your tax return. Instead, attach a statement to your tax return showing the details of the involuntary conversion. Include within the attachment:
1. Evidence of existence of the drought conditions that forced the sale or exchange of the livestock,
2. A computation of the amount of gain realized on the sale or exchange; and,
3. The number of beef animals, by type, i.e., heifers, cows, steers, bulls, etc., that would have been sold or exchanged under the usual business practice in the absence of the drought.
If livestock are sold because of a drought condition, the gain realized on the sale does not have to be reported if the proceeds are used to purchase replacement livestock within two years of the end of the tax year of the sale. This applies to beef cattle held for any length of time or purpose, i.e., breeding, stockering, feeding, etc.
The new beef animals must be used for the same purpose as the old beef animals sold (animals used for breeding purposes must be replaced with animals for breeding purposes). The taxpayer must show that the drought caused the sale of more animals than would have been sold without the drought conditions. The cattleman has a basis in the replacement animal equal to the basis in the animal sold, plus an amount invested in the replacement animal that exceeds the proceeds from the sale. In this case, there is no requirement that the drought conditions cause an area to be declared a disaster area by the federal government. NOTE: Animals calved and raised on farm have no basis. This zero basis applies to all farm-raised cows, replacement heifers and young calves. Expensing production costs from your annual taxes is the reason why the basis is considered zero.
If any livestock are sold because of drought conditions, you may also be eligible for another exception to the general rule that the sale proceeds must be reported in the year they are received. This election applies to all livestock. This exception allows the taxpayer to postpone reporting the income by one year.
To qualify, the taxpayer must show that the animals would normally have been sold in a subsequent year. Additionally, the sale of the livestock must have been prompted by a drought that caused an area to be declared a federal disaster area. It is not necessary, however, that the animals be raised or sold in the declared disaster area. And, the sale can take place either before or after the declaration of a disaster area as long as the same disaster caused the sale.
Cattle producers who have had to sell cattle because of the drought should investigate these tax provisions. It is always suggested that you contact a competent tax advisor for a complete evaluation of your tax situation.
Internal Revenue Service (800) 829-3676, for forms; your local emergency government office; income tax preparers;
IRS Publications available on-line:
IRS Publication 225, Farmers Tax Guide
IRS Publication 334, Tax Guide for Small Business
IRS Publication 547, Nonbusiness Disasters, Casualties and
Thefts
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