Income tax rules to consider after selling livestock due to weather-related events
Many livestock producers in the West this year have been adversely affected by drought and had to sell part of their herd. Without adequate feed and with higher feed costs, rather than going into debt to buy additional feed, they chose to sell more cows than usual or sell calves at a younger age and lower weight to ease grazing pressure on pastures. Those producers wonder how to treat the extra income at tax time.
Oklahoma State University Extension Income Tax Specialist JC Hobbs has been advising tax preparers, farmers and ranchers for 20 years.
“I work with cow/calf producers, stocker operations and crop farmers,” he says.
“There are two sets of income tax rules for weather-related sales of livestock due to drought, flood, hurricane, tornado, etc. Perhaps we had too much rain and crops were lost and there’s less forage, or not enough rain and pastures suffered,” says Hobbs.
“One rule applies to all livestock other than poultry; it includes any breeding, dairy, draft, market animals, etc. which were sold in excess of the number of animals which would normally have been sold if the adverse weather conditions had never occurred,” he explains. “In order for this provision to be used, it requires the county or region to receive a federal disaster declaration. The extra animals sold this year, by category (cows versus calves, etc.) are then compared to the average number of animals sold during the prior three years. Those years are what we call the ‘normal or average’ years.”
Due to the drought, flood or other condition, the producer sold more animals than the normal or average number.
“A producer can postpone reporting the income from the extra animals sold by electing to report the income on the tax return for the year the animals would have normally been sold to avoid the bunching of income in the current year,” he explains.
“For example, if a producer sold more calves this year than they normally would have put on pasture and sold in the following year, this rule would apply. They didn’t have the pasture, so they sold them early, or they sold all their replacement heifers this year instead of keeping them to add into the herd,” says Hobbs.
In these situations, producers can elect to roll the excess income into the following year. If they sell more animals in 2022, they will more than likely have less income in 2023, due to the fact they won’t have those animals, so they pay tax at a lower rate on the excess income if it is moved into 2023, notes Hobbs.
In addition, other tax rules allow a producer to later replace the animals sold. This rule strictly applies to breeding, dairy and draft animals sold in excess of normal to severe, extreme or exceptional drought conditions or other weather-related conditions which resulted in the sale of the animals. Should this occur, the producer can postpone reporting the income from the excess animals sold on this year’s tax return and elect to replace the sale proceeds in like-use replacement animals within two years after the sale occurred.
“When looking at excess sales of breeding livestock – cows, bulls, replacement heifers, etc., producers would look at the previous three years (and their normal culling rate), and if this year due to the drought they sold more than normal, this rule could apply,” says Hobbs. “Let’s say someone has 100 cows and normally culls 20 percent (20 cows), this year (2022), due to the drought, they culled harder and maybe culled 35 cows. The number of cows in excess of normal (an additional 15 cows) are what would qualify for the postponed income reporting.”
On the 2022 tax return, producers can elect to replace those cows and as long as the repurchase occurs by Dec. 31, 2024, they do not have to report the income on the 2022 tax return, he mentions.
“Let’s say producers sold the extra 15 cows due to the drought for $15,000. They don’t have to buy back 15 cows; they have to buy back $15,000 worth of cows. If they are selling due to drought, the price may be depressed, and when they buy cows back at market price the next year, they may cost more. We don’t buy back head-for head; we buy back the dollar worth,” he says.
A person has two years to buy them back after the drought ends. However, if the county receives a federal disaster declaration, the amount of time to replace is extended to four years.
“If, for some reason, producers don’t spend at least $15,000 to replace the cows, they will have to amend the 2022 tax return where they made the election to use this rule; they must report the income, the amount of dollars they didn’t replace the cows with and pay tax on that,” says Hobbs.
“The other side of this is when they buy back more than $15,000 worth of cows. This often happens, because the new cows often cost more than the ones sold. The producer is then allowed to depreciate the excess and write it off as a depreciation expense,” shares Hobbs. “Producers are still postponing the income recognition until those replacement animals are later sold. If they buy young ones, they may have them on the farm for six to eight years or more. Then when they sell them, they pay the taxes on the deferral.”
Record keeping and weather patterns
“If producers decide to sell more cows than normal this year, and have another drought year in the next or even the year after, as long as the drought continues, they can keep kicking that can on down the road,” he says. “If there is still drought in 2023, producers still have two more years to buy cows back again.”
Record keeping is very important, Hobbs notes. Farmers and ranchers can also watch the drought monitor maps showing areas of the country that are abnormally dry or experiencing moderate to exceptional drought conditions.
“If the drought monitor map shows a producers’ area to be in severe, extreme or exceptional drought, that’s when the two-year rule kicks in and they have a couple years to purchase cows to replace what they had to sell this year,” Hobbs shares. “When producers do replace the animals, they have to be the same type and purpose. If they sold a breeding beef animal, for instance, they must buy back a breeding beef animal. If producers sold dairy cows due to the drought, they must buy dairy animals.”
For more information, visit ruraltax.org or fsa.usda.gov/programs-and-services/disaster-assistance-program/disaster-designation-information/index.
Heather Smith Thomas is a corresponding writer for the Wyoming Livestock Roundup. Send comments on this article to roundup@ wylr.net.