Expert recommends producers consider taxes when liquidating
In a recent University of Nebraska-Lincoln (UNL) BeefWatch podcast, UNL Farm and Ranch Management Specialist Jay Parsons discusses tax implications producers may face when liquidating a cowherd.
During the podcast, Parsons shares his knowledge on certain actions and decisions producers make, especially during a drought, may influence tax situations. He encourages producers to consider how liquating a cowherd might affect their situation.
Parsons coauthored a BeefWatch newsletter with UNL Extension Educator Steve Niemeyer on the topic.
A majority of the West has experienced widespread drought, and there are several considerations ranchers need to evaluate and understand when liquidating a cowherd.
“Sales income from liquidating cows would be taxable minus any depreciable value left on purchased animals,” shares Parsons. “Due to drought, sales income may be postponed for up to two years.”
Parsons continues, “The idea here is if producers plan to use the sales proceeds to buy back assets used in the farming/ranching enterprise, including the purchase of replacement cows, it gives them time to do so.”
Oftentimes, producers raise their own replacements and when cattle are sold this generates revenue, which will be taxed as income on a Schedule F if not filed correctly, explains Parsons.
“From a tax standpoint, this practice ends up working out to be a like-kind exchange,” he shares.
The biggest factor for producers to consider is marginal tax rates, which will apply to income, especially if all of the cattle sold were raised by the producer.
“A large flush of income could push producers into some very high marginal tax brackets,” says Parsons. “It is a much better tax outcome if producers can spread sales out over multiple years or manage it in a way so producers don’t have a significant amount of income subject to the higher end of tax rates.”
He shares, there are some tax rules to help ease the burden of weather-related activities, which can also be spread over a couple of years. This allows producers to reinvest back into the operation and avoid paying a big tax bill up front.
Parsons adds, producers can reinvest back into the operation without having to invest back into cattle and there are options for producers to discuss with their tax accountant when dealing with a big influx of income.
“Every situation is unique and sometimes producers don’t provide a full picture of what is going on,” explains Parsons. “Producers need to be completely up front with their tax accountant about their current situation.”
He suggests producers consult with a tax advisor before committing to liquidating a significant number of cows, but an online/print resource producers Parsons recommends is the IRS Publication 225.
Under The Farm Income section, producers can find the topic Sales Caused by Weather-Related Conditions, which can help producers determine where a drought situation can be considered.
“All of these are tools to give producers talking points in getting advice from a tax expert who knows an individual financial situation and can help producers navigate the situation,” explains Parsons.
He also suggests having a conversation with a banker to determine how liquidating may affect the financial aspect of an operation.
There are two big tax-related considerations if producers are considering liquidating a cow/calf herd, mentions Parsons.
Producers need to determine if they plan to re-invest the cash inflow from liquidation back into the operation over a two-year timespan and if reducing exposure to high marginal tax rates would assist in reducing negative financial impact from the liquidation process.
“It’s looking at the overall farm picture,” Parsons says. “Just because producers sold mixed-aged cows, doesn’t mean they have to reinvest into a similar production situation or value.”
He concludes, “Producers are looking at the overall asset being purchased and put back into use on the operation.”
Brittany Gunn is the editor of the Wyoming Livestock Roundup. Send comments on this article to firstname.lastname@example.org.