Sold Cattle Early? Here Are Tax Options

Both methods help you defer taxable income.

Published on: Aug 2, 2006

Two tax options are available for livestock producers who are forced to sell cattle early due to continued drought conditions and wish to defer taxable income.

"There are some laws already in place, but two particular deferral elections for livestock are becoming important these days," says Tina Barrett, executive director of Nebraska Farm Business Inc.

The first option is a one-year deferral that allows producers to file income received from cattle sold the year of the drought to the following year. For example, cattle sold this year won't be recognized as a gain until 2007, she says.

Producers are given a second option to replace breeding livestock without recognizing a gain for the initial sale. In previous years, producers were given a two-year period to replace the livestock. Now that time period has increased to four years, Barrett explains.

"If it still isn't feasible to reinvest in livestock within four years, you can now invest that money in a different type of asset used for farming purposes,” she says. “It doesn't let you invest in land, but you could take the money from the cows and invest it in a new tractor."

In order to claim a deferral, producers must be able to prove that the drought did cause a premature sale of livestock. Raising livestock in a county declared a federal disaster area is sufficient proof. For producers in other counties, proof such as the release of CRP land for grazing or haying is needed.

Producers should remember there are some instances where they may choose to recognize the income, according to Barrett.

"If the gain on the sale of livestock is deferred, capital gains today are reduced, but so is the tax basis in the replacement animals in the future. As a result, the depreciation expense allowed on those animals is also reduced. Therefore, a sole-proprietor is trading what could be a 5% federal tax for at least a 30% tax savings in the future."

Drought conditions can cause an overall drop in a given year's income. In these situations, it may be necessary to show the gain from sale of livestock to avoid showing loss on tax returns, she says.

The important thing to remember is that situations and circumstances are unique, so it is beneficial to keep all options open and consult a tax professional.