Consider tax filing options for ‘05 livestock sales 

By KARI KRAMER | East Texas Edition

Jan. 19, 2006 - Several producers were forced to sell their herds in response to the drought that has spread throughout the state.

The Federal Government and Internal Revenue Service has a few tax options available for producers who sold more stock than usual in 2005.

Blake Bennett, an Extension economist based in Dallas, said the options basically boil down to one idea.

�Producers are exempt from declaring capital gains on (stock) sales that are above and beyond normal sales,� he said.�

There are two postponement opetions are based on the circumstance that the 2005 drought caused a producer to sell more of their stock than normally sold in previous years. Evidence of previous years’ sales and 2005 sales will need to be taken to a certified public accountant when taxes are filed.

The first option is for people who sold more stock than usual and plan to reinvest. This is from Internal Revenue Code section 1033(e). This applies to livestock (other than poultry) that had previously been held for draft, breeding, and/or dairy purposes. The reporting of gains can be postponed and the livestock can be replaced. 

The use of this provision is not dependent on the area being declared a disaster area, but the replacement time allowed is variable to that distinction. Under the American Jobs Creation Act of 2004, the normal period for replacement is two years from the end of the year the sale took place (2005) or four years from that date, in the event the area has been declared for federal assistance.

As a general rule, the replacement livestock must be used for the same purpose as the stock that was sold, unless it is not feasible to do so. In addition, this section does not require that farming be the principal income of the taxpayer opting to postpone gains. 

In order to claim under this section, several pieces of information should be documented or included when filing.

When the taxpayer states they are claiming postponement under section 1033, they should include (1) evidence that weather-related conditions prompted the sale of more than normal numbers; (2) the number and type of livestock sold; (3) mathematically show the amount made from the year’s entire sales of the livestock the postponement is referring to; (4) document the number of the livestock that would have normally been sold in an average year; and (5)document the difference in income that will be postponed. 

In documents provided by Dr. Wayne Hayenga, a Texas A&M University professor and Extension economist, the formula for No.5 would be: the total income from the sale of specific livestock divided by the number sold (this results in the average amount received per head). Take that average and multiply by the excess number sold. If 100 head are usually sold but 150 head were sold in 2005, then multiply by the additional 50 head. The total of this equation is the income postponed. The equation looks like this:

(Total income from sale/Total number sold) x Excess number sold = income that may be postponed.

This formula can also be used for the second option (under section 451(e)) which allows a producer who sold more stock (including poultry) than normal to postpone the gain from the excess sale until the following tax year. To use this option, a disaster declaration must be made, but the stock did not have to be held or sold in the disaster area itself, only surrounding areas. Livestock may have been sold before the disaster declaration was made, but the reason for the declaration must have also been the reason for the excess sale.

This section requires the filer postponing the excess gain claims farming as their principal business and uses cash accounting.

When using this method, the filer should (1) declare they are filing under section 451(e) and provide; (2) evidence how the drought forced early sales and include, if known, the date the area was made eligible for federal assistance because of the drought; (3) an explanation of the relationship between the drought area and the excess sale should be provided; (4) documentation that proves the number of stock sold during the previous three years should be included; (5)provide an indication of the number of stock that would have been sold if normal weather patterns had occurred; (6) records of the total number of stock sold and the number sold strictly on the account of the drought; and (7) indicate (using the formula above) the amount of income to be postponed until the following year.

Taxpayers should make their accountants aware of which method they wish to use, if they decide to defer the excess income. 

With many parts of the state ending 2005 with with a rainfall deficit of more than 20 inches, there are many Texans who qualify to take advantage of these postponement options. These options have been made available to taxpayers in the past, according to Bennett. He said the options were used extensively in 2001 and 2002. 

The National Oceanic and Atmospheric Administration recently released a seasonal drought outlook. NOAA has predicted that the drought will persist or intensify in North and Central Texas, with the drought remaining steady or improving slightly in some areas of Southeast Texas. A drought is expected to develop in areas of West Texas. Taxpayers may want to take the seasonal outlook into consideration when examining their postponement options. Drought information and ongoing outlooks are available at the NOAA website: http://www.drought.noaa.gov/.

More information about farm taxes and postponement options can be found in the Internal Revenue Service’s online publication, “Farmer’s Tax Guide,” at http://www.irs.gov/publications/p225/index.html. Chapter 11, titled “Postponing gains,” contains relevant information.