Income May be Deferred on Forced Livestock Sales

Drought conditions continue to expand across the central and western United States, raising the likelihood that farmers and ranchers may be forced to sell more livestock than usual due to lack of feed sources. When these forced sales occur there are special tax provisions that can allow farmers to defer the income received on those sales.

Two tax deferral strategies that farmers and ranchers could consider include:

Involuntary Conversions

If you sell livestock (other than poultry) held for draft, breeding or dairy purpose solely because of drought conditions, you may treat the livestock sold in excess of the number you normally sell as an involuntary conversion. This would allow you to defer the income for up to two years, if you replace the livestock sold with similar livestock (breeding stock replaced with breeding stock) within that two-year replacement period.

The two-year replacement period is extended to four years if you are in a county eligible for federal assistance due to drought.

Example

You normally sell 25 cows from your breeding stock each year. In 2022 due to severe drought, you did not have enough feed sources to feed your normal herd through the winter. As a result, you were forced to sell 50 cows from your breeding stock in 2022 and realized $50,000 from this sale.

If you plan to replace the cows sold in 2022 by December 31, 2024, the gain from 25 cows (the excess of the cows normally sold each year) may be deferred and the gain would not have to be recognized until the replacement cows are sold.

One-Year Deferral

If due to severe drought you sell livestock in excess of what you would sell under normal conditions, you may be able to postpone the reporting of income on the excess head until the following taxable year. In order to qualify for this one-year deferral, you must meet the conditions below.

  • Your principal trade or business is farming.
  • You use the cash method of accounting.
  • You can show that, under your usual business practices, you wouldn’t have sold or exchanged the additional animals this year except for the weather-related condition.
  • The weather-related condition caused an area to be designated as eligible for assistance by the federal government.

Example

You normally wean 80 calves in the fall and feed them through the winter, selling in January or February. Due to severe drought, you do not have enough feed sources to feed all of your calves, so you sell 25 head in the fall and plan to sell the remaining 55 head in January. As a result, you sold 105 head during 2022 (80 in January and February of 2022 and 25 in the fall of 2022).

You realized $94,500 from the sale of all calves in 2022 ($94,500 ÷ 105 = $900 per head).

In August, as a result of drought, the affected area was declared a disaster area eligible for federal assistance. The income you can postpone until 2023 is $22,500 ($900 per head × 25).

If you think you may be forced to sell livestock due to the drought, contact your Adams Brown advisor for a discussion about the tax relief that may be available to you.