Implications To Missouri Farm Taxes of Livestock Sales Due To Drought
When dry weather conditions in parts of the country cause forced liquidation of breeding livestock and early sales of market livestock, livestock producers forced to sell livestock because of abnormally dry conditions may receive special consideration for Missouri farm taxes.
Tax Implications of Drought Induced Livestock Sales
If a producer is forced to sell livestock, in excess of normal levels due to shortages of water, feed or other consequences of drought, the income tax on the gain from the sale of those animals may be postponed. Producers have two distinct tax options available to them in this circumstance:
- Tax Treatment #1, Code Section 451(e): The election to postpone reporting the taxable gain on the additional sales of any livestock for one year; or
- Tax Treatment #2, Code Section 1033(e): The election to postpone, and altogether avoid, paying taxes on the gain from the sale of breeding, draft, or dairy animals if they are replaced within a specified time frame.
Both these Tax Treatments require that drought has caused sales to exceed the normal level. Eligibility for the two different treatments depends on the class of livestock sold and whether the federal government has designated your area as eligible for assistance.
One Year Deferral
A one-year deferral is available for all types of livestock (draft, dairy breeding & feeding) if you qualify for the following:
- You are a cash basis farmer or rancher
- Your normal business practice would be to sell the livestock in the following year
- The livestock was sold due to drought conditions.
Four Year Deferral
Draft, Dairy & Breeding livestock have a second option. If you have to sell a draft, dairy or breeding animal, you have 4 years to replace the animal and defer the gain. The gain from the sale of the animal will reduce the basis of the replacement animal, much like trading a piece of equipment. If the drought continues beyond 4 years, you can extend the replacement period to one year after the drought ends.
You also have the option, after 4 years to replace the animals with other assets that can be used in your farming business, if it is still not feasible to replace the animals. Real property (specifically land) is excluded from this option, but you can use the proceeds of the livestock sale to purchase a tractor and defer the gain on the sale of the livestock. You must wait until the end of the four year period to use this option. Until that time you can only replace livestock with livestock of the same purpose. For example, you can only replace beef cattle with beef cattle and dairy cattle with dairy cattle.
What Constitutes a Drought?
You must be able to prove that the drought did in fact cause the livestock to be sold. If your county or one that borders you has been declared a Federal Disaster Area, you have sufficient cause to use the elections. Other things to use as proof are the release of Conservation Reserve Program for grazing or haying.
The IRS extends the four-year replacement period when a taxpayer sells or exchanges livestock due to persistent drought. The extension continues until the taxpayer’s region experiences a drought-free year.
The first drought-free year is the first 12-month period that:
- ends on August 31 in or after the last year of the four-year replacement period, and
- does not include any weekly period of drought.
At Schultz Wood & Rapp, our CPAs are familiar with Missouri Farm Taxes and can help livestock producers considering marketing livestock at abnormal times due to dry conditions. Close consultation and tax planning with our accountants can be very beneficial if you have to make substantial drought sales.