July 17, 2002

Forced Livestock Sales May Have Tax Implications, Farm Management Specialist Says

As livestock producers in drought-impacted counties of the region struggle to find enough feed for the winter, some may be forced to sell livestock. Those sales could result in added tax obligations, a North Dakota State University economist warns.

"Reducing herds could mean producers will have livestock sales in 2002 that normally would have occurred in 2003," notes Dwight Aakre, farm management specialist with the NDSU Extension Service. "Those sales could result in higher tax obligations than if sales were distributed normally."

Internal Revenue Service rules allow producers to postpone reporting a gain from the sale of some livestock if the sale was caused by weather-related conditions. Drought conditions resulting in reduced feed production is a qualifying condition, Aakre says. IRS offers two options for postponing reporting of gain from forced sales.

One option is to defer income to the next tax year. This method can be used for all livestock regardless of age, sex or species. To qualify, the farm business must be located in an area that has been declared a disaster and weather conditions must have forced the sale. Only sales in excess of normal sales qualify for deferral. This action results in postponing recognition of income on the excess sales by one year.

An example where this rule may apply would be when a producer sells two calf crops in one year. This might occur when a producer normally backgrounds his own calves after weaning and sells them in January. Having sold the 2001 calves in January of 2002 and now being forced to sell the 2002 calves at weaning due to lack of feed the producer would be faced with two years of income but only one year of expenses. Next year he would not have income from calf sales if he returns to normal marketing practices. This option allows him to defer reporting the sale of the second set of calves until the next tax year. The actual amount deferred is the value of the number of animals sold in excess of the average number sold in the last three years.

The second option allows for deferral of gain from excess sales when these animal are replaced within two years. This provision only applies to sales of draft, breeding or dairy livestock. Calves do not qualify. The sale must have been weather-related, but it is not necessary for the area to have been declared a disaster area. This provision also applies only to the number of animals sold in excess of the number that would be normally sold. This provision is applicable where a portion of the cow herd is liquidated.

As an example, a producer has sold an average of 25 cull cows per year over the last three years and this year he sells 75 cows to adjust to the available feed supply. The income from the sale of the 50 cows in excess of normal sales may be deferred. If the producer purchases replacements within two tax years, the capital gains value of the animals sold is subtracted from the basis of the replacement animals purchased and no current tax is due. If these animal are not replaced, tax on the capital gains plus interest is due.

Aakre says both provisions allow for income for tax purposes to be treated as close to normal as possible. The rules do not eliminate the tax obligation.

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Source: Dwight Aakre, (701) 231-7378, daakre@ndsuext.nodak.edu
Editor: Tom Jirik, (701) 231-9629, tjirik@ndsuext.nodak.edu