Drought-related livestock sales pose tax issues

Drought-related livestock sales and special tax issues

If you sell more livestock than you normally would in a year because of weather-related conditions, you will want to discuss the tax treatment of the sales with an accounting professional, according to SDSU Extension management specialist Jack Davis.

Davis says you may be able to postpone reporting the gain from selling the additional animals until the next year, or if you sell livestock held for draft, breeding or dairy purposes, because it is considered an involuntary conversion.

Davis says you may postpone reporting the gain until the next year if you meet the following conditions:
1) Your principal trade or business is farming;
2) You use the cash method of accounting;
3) You can show that, under usual conditions, you would not have sold the animals this year except for the weather-related conditions;
4) The weather-related conditions caused the area to be designated as eligible for assistance by the federal government. Sales made before an area becomes eligible for federal assistance qualify if the area is later designated eligible.

Some key items include:
Usual business practice. The number of animals you would have sold in the absence of weather-related conditions. This can be done from past sales records. If you have not yet established a normal business practice, rely on the business practice of similar farms in your area.
Classes of livestock. You must figure the amount to be postponed for each generic class of livestock, sheep, cattle, pigs and horses. Do not separate animals based on age, sex or breed.
Amount to be postponed.
1) Divide the total income realized from the sale of all livestock in the class during the tax year by the total number of head in that class sold. Ignore any postponed gains from previous years.
2) Multiply the result by the excess number of such livestock sold solely because of weather-related conditions.

Example: You normally sell 200 head a year and due to drought, you sell 250 for $163,000. If the area is declared a disaster area due to the drought, the income you can postpone to 2007 is $32,600 {($163,000 / 250) x 50}.

If you sell livestock held for draft, breeding, or dairy purposes solely because of drought or other weather-related conditions, you may treat the sale as an involuntary conversion. This applies to livestock only in the excess of what you would normally sell. If you later replace the livestock, you may be able to postpone reporting the gain.

Information required includes:

– evidence of the weather-related conditions that forced the sale;
– the gain realized on the sale;
– the number and kind of livestock sold;
– the number of livestock you would have sold under normal conditions.

Information required when you replace the livestock includes:

– the date you bought replacement property;
– the cost of the replacement property;
– description of the replacement property.

If you sell or exchange livestock because of weather-related conditions and it is not practical for you to reinvest the sales proceeds in livestock, you can treat other property used for farming purposes as similar property for postponing the gain. Real property is excluded.

The replacement period begins on the day the livestock is sold. The replacement period ends four years after the close of the first tax year in which you realize any part of your gain from the involuntary conversion.

The IRS may extend the replacement period on a regional basis.