Dec. 1, 2011 - With tax time just around the corner, many cattlemen are curious how that "additional income" from liquidating herds will affect them.
According to Texas AgriLife Extension Service Economist Blake Bennett, the situation is not as scary as it may look. The government has actually put some "treatments in place for just these types of situations.
"There are two different treatments that we have got to look at this year," Bennett explained. "One of them applies to draft, breeding or dairy animals -- that is like your momma cows and your dairy animals -- that maybe had to be sold. Those, you are looking at having to replace them within two years. The second one applies to all livestock -- it doesn't matter what it is it can be calves, it can be stockers, you name it. -- That one allows you to postpone reporting your sales for one year."
Bennett stressed that it is important to consult a tax professional before choosing to opt for one of these treatments.
"Make sure that you consult you tax professional before you make a decision," he cautioned. "Depending on which way you go, it can impact your financial situation, every single operation is different. Everybody is different here. So, make sure that you consult you tax professional."
In both cases, whether dealing with breeding and dairy animals or stocker animals, it is only when the livestock owner sells over and above what they normally would that allows them to either buy back in two years, or have the deferment on livestock sold.
It should also be noted that while weather conditions do have to be sited as the reason for selling the extra stock, there is no requirement that the area affected by the weather related conditions has to be declared a disaster area at the time of sale. The sale can take place either before or after the area is declared a disaster, just as long as the disaster caused the owner to sell the cattle.
"It doesn't matter if you sold them before or after, you will be grandfathered in if you sold them before it was declared a disaster, that is not a problem," Bennett said.
Regardless of which treatment is used, a livestock owner can only exempt the livestock that are sold over and above what they would normally sell.
"Say you normally only sell 20 percent of your herd every year, and this year you had to liquidate them all, that 80 percent are the only ones that you are going to be able to defer," Bennett said. "So, you are going to have to do some calculations in here to say that, 'normally I only sell say 20 percent and now I am going to have to sell 100 percent and I am not going to have to claim that 80 percent -- the difference between what I normally do and what I did this year.' That is the big situation here that we have to deal with."
The first treatment comes with a few guidelines for filing.
"It has to be because of weather condition, you know drought is the reason that you got rid of the cows," Bennett said. "The gain on the sale does not have to be recognized, as long as you go back in and you replace stock within two years... That is the caveat there, you are looking at, 'I had to reduce my herd this year and in the next two years I am going to have to buy them back.'"
Another requirement is that the livestock bought back have to be used for the same purpose as the stock that was sold.
"You can't go in and sell beef cattle and go back in and buy dairy cattle or sheep," Bennett explained. "If you sold livestock for beef production then you have to go back in and buy livestock for beef production, that is just one of the stipulations."
When filing, there are some things that have to be done whenever the livestock owner goes in intending to proceed with the first treatment option. First, they have to attach a statement to their tax return that shows that they had weather-related conditions. Then, they have to compute the amount of gain realized on the sale or exchange. They will need to put the number and kind of livestock sold or exchanged and finally have to put the number and kind of livestock that would have been sold under usual business practices.
Those that qualify for the second treatment are looking at calves, stockers and other animals that are not for breeding. With this treatment, tax payers can defer the income for one year.
""The amount that can be postponed has to be in excess of the number that you normally sell." said Bennett. In other words, if you sell 150 head because of the drought this year, but you usually only sell 100 head of calves, then you can postpone the income for that additional 50 head for next year."
To qualify for the second option, the livestock owner has to show that their principal business is farming or ranching, they have to use cash accounting method of accounting on their books and they have to show that livestock normally would have been sold a year or more further down the road and that the sale was caused by weather conditions.
Some still might have concerns about the likelihood of the drought continuing, hindering their ability to replace cattle in the two-year span allocated. According to Bennett, tax laws are re-written all the time and concessions will surely be made.
"They will take that into consideration, and it would be my opinion that if we see continuation of the drought, then you are probably going to see particularly the one where you have to buy back within two years, that is going to be adjusted," he said.
So, while the situation doesn't look good on the cattleman's end, concessions are being made to help them adapt. The most important thing to do is consult a tax professional to ensure the best avenues are explored.