Existing income tax provisions may provide relief for producers who have sold more livestock than normal because of the ongoing drought or other weather-related conditions.
“Each provision may allow a producer to reduce the tax consequences of bunching of income, which may help reduce stress on an operation’s finances,” said Marty New, Comanche County Extension director and agricultural educator.
The first provision applies to a producer who has sold more livestock than normal because of adverse weather.
“Income from the animals sold that were in excess of normal sales may be postponed until the following tax year when the income normally would have been recognized, provided certain conditions are met,” said JC Hobbs, Oklahoma State University Cooperative Extension agricultural economist.
To take advantage of this provision, the weather-related condition must have caused the area to receive a disaster declaration. All 77 counties in Oklahoma have been designated as eligible for federal assistance and have received disaster declarations from President Obama or from an agency or department of the federal government.
Thus, producers in all 77 counties are eligible to use this provision provided they meet the following qualifications:
- The producer’s principal business must be farming or ranching and use the cash method of accounting;
- The producer must show that the livestock would normally have been sold in the following year; and
- The weather-related conditions that caused an area to receive a disaster declaration must have caused the sale of the livestock.
“The first provision applies to any livestock sold in excess of normal caused by weather-related conditions,” Hobbs said. “Refer to Internal Revenue Service Code Section 451e.”
The second provision applies only to breeding, dairy or draft animals that were sold in excess of normal. A producer may elect to replace the animals sold within a 2-year period with like animals used for the same purpose, and thus defer the recognition of income until the new animals are sold.
“Unlike the first provision, there is no need for a disaster declaration,” Hobbs said. “All that is needed is proof that drought conditions existed that caused the sale of additional animals.”
However, if an area has received a disaster declaration made by the president or by an agency or department of the federal government – all 77 Oklahoma counties in this instance – the replacement period is extended to four years and not just two.
“A producer must repurchase the same dollar amount of animals sold in excess of normal, not just the number of excess animals sold,” Hobbs said.
Hobbs said there is no requirement as to how long the animals were held by the taxpayer in order to receive this treatment. However, the producer must provide evidence of the weather condition and a calculation of the gain for each number and kind of animal sold. Refer to IRS Code Section 1033e.
“This is only a brief discussion of the rules that apply to weather-related sales of livestock,” New said. “Consult your tax preparer or adviser for additional information concerning the income tax implications that might apply to your specific business situation.”