Tax Management Resources

Livestock producers who are forced to sell livestock due to drought conditions may receive special considerations for federal income tax reporting purposes. Income tax reporting for forced sales of livestock because of drought or other weather-related conditions may be handled in two different ways, according to Internal Revenue Service (IRS) guidelines. There are two different tax treatments, both of which apply to drought, flood or other related weather conditions sales in excess of normal business practices.

1) The first applies to all livestock, and allows a 2-year postponement of the livestock destroyed, sold or exchanged because of disease is deemed to be treated as involuntarily converted. IRC section 1033(d).

2) The second applies to draft, breeding or dairy animals that will be replaced with in a 2-year period, or if the loss occurred in a President declared disaster area, the replacement period is 4 years. IRC section 1033(e).

Also, if it is "not practical" for the producer to reinvest in the same class / quality of livestock, other classes of livestock or property (except real property) used for farming or ranching may qualify as replacement property.

Irrespective of the alternative chosen, good financial and production records are critical. Any gain that is postponed must be substantiated based on what sales would have normally occurred had there not been a designated disaster. Also, if a gain is postponed and replacement livestock is acquired after you initial tax return has been filed, you are required to attach a statement to your return in the year of replacement acquisition as evidence of the weather-related conditions that forced the sale; the gain realized; the number and kind of livestock sold; the number and kind of livestock you would have normally sold; the dates you bought replacement livestock; the cost of the replacements, and the description of the replacements. Good records will help in evaluating tax implications and determine the strategy that will work best for you.