WVU Extension Service
Farm Management Specialist
If a farmer sells livestock because he has a weather-related problem such as a shortage of water or grazing crops, the proceeds may be reported in a subsequent tax year. It is important for the farmer to not suffer tax consequences on top of drought problems.
Two types of livestock sales may be affected, and each is reported differently. The first is breeding, dairy, and draft animals that are sold because of weather-related conditions. The gain realized on the sale does not have to be recognized as income if the proceeds are used to replace the same kind of livestock within two years.
The new livestock must be used for the same purpose as those sold. The taxpayer must prove that weather caused the sale of more livestock than normally is sold or culled, but a federal declaration is not necessary. For example, if a farmer normally sells or culls 10% of his herd but sells 20% due to the weather, the extra 10% qualifies for this provision. For the new purchases, the farmer will assume the basis he had with the old plus any extra amount invested greater than the weather-related sale.
Making this election
The farmer does not report the gain but attaches a statement to the tax return showing such details as evidence of the weather condition, a computation of the amount gained on the sale or exchange, and the number and kind of exchange compared to the number normally sold each year.
An example follows: Farmer Smith normally sells 15 cows from his beef herd each year. Because of drought conditions in 1999, he did not have enough hay to winter his normal size herd. So, he sold an extra 20 cows. He plans to replace them in 2000.
The extra 20 cows soldnot all 35qualify for gain deferral. So, he simply does not report the gain from the 20 cows and then attaches a statement like this: "The drought condition defined by the attached rainfall report caused me to sell 35 cows rather than 15 head in 1999. The raised cows have a zero basis. The 35 cows sold for $20,135. This taxpayer elects to defer the recognition of the gain on the 20 extra head by the average per head total multiplied by the extra 20 head sold ($20,135 divided by 35 = $575/head, $575 x 20 = $11,500)."
When the farmer replaces the cows in the year 2000, if he invests the same $11,500 he will have a zero basis. But if he invests more to replace the 20 cows, this difference will then become his basis. If the farmer in either 2000 or 2001 replaces only 19 cows, the remaining $575 must be reported as income on an amended return.
Deferring livestock income
One other provision can help farmers manage unplanned income. This deals with electing to defer livestock income to a subsequent tax year. Called the "postponed report option," this election is much more restricted than the breeding/milk deferral options. It allows the farmer to defer reporting the income from the forced sale of livestock to the year they normally would have been sold.
Some specific conditions must be met. The principal business of the taxpayer must be farming; the taxpayer must use the cash method of accounting; the taxpayer must prove that the livestock would be sold the subsequent year; and the sale must have been caused by a drought that resulted in the region being declared a disaster area.
For example, Farmer Jones normally sells 100 raised cattle a year. Because of the drought he sells 150 head for a total of $45,000. The area was declared a disaster area. The income Farmer Jones is eligible to postpone is figured as follows:
Total income from cattle in 1999 divided by the total head sold in 1999 equals average dollar per head. This average is multiplied by the excess cattle sold to figure the income that qualifies for postponed income.
$45,000 divided by 150 head = average per head of $300
$300 x 50 head = $15,000
Farmer Jones reports $30,000 in 1999 and $15,000 in 2000.
Farmer Jones must attach a statement to the return that includes the following: a declaration that he is making an election; evidence that the area is a declared disaster area and that those conditions forced the farmer to sell early; and the total number of animals sold in the three preceding years and the number that would have been sold under normal business practice.
Income averaging is the only relief for forced-sale income for farmers who dont claim farming as their principal business.
For more information, contact Tom McConnell at 304-293-6131, ext. 4237.