Drought-Related Livestock Sales Pose Tax Issues

 BROOKINGS, S.D. -- If you sell more livestock than you normally would in a year because of weather-related conditions, you will want to discuss the tax treatment of the sales with an accounting professional, a South Dakota State University specialist said.

SDSU Extension Area Farm Management Specialist Jack Davis said you may be able to postpone reporting the gain from selling the additional animals until the next year or if you sell livestock held for draft, breeding or dairy purposes. It is considered an involuntary conversion.

 Davis said you may postpone reporting the gain until the next year if you meet the following conditions:

* Your principal trade or business is farming.

* You use the cash method of accounting.

* You can show that, under usual conditions, you would not have sold the animals this year except for the weather-related condition.

* The weather-related conditions caused the area to be designated as eligible for assistance by the federal government.

Sales made before an area becomes eligible for federal assistance qualify if the area is later designated as eligible.

Some key items include:

Usual business practice. The number of animals you would have sold in the absence of the weather-related conditions. This can be done from past sales records. If you have not yet established a normal business practice, rely on the business practice of similar farms in your area.

Classes of livestock. You must figure the amount to be postponed for each generic class of livestock, sheep, cattle, pigs, and horses. Do not separate animals based on age, sex, or breed.

Amount to be postponed.
1) Divide the total income realized from the sale of all livestock in the class during the tax year by the total number of head in that class sold. Ignore any postponed gains from previous years.

2) Multiply the result by the excess number of such livestock sold solely because of weather-related conditions.

Example. If you normally sell 200 head a year and due to drought you sell 250 for $100,000.  If the area is declared a disaster area due to the drought, the income you can postpone to 2003 is $20,000 {($100,000 / 250) x 50}.

If you sell livestock held for draft, breeding, or dairy purposes solely because of drought or other weather-related conditions, you may treat the sale as an involuntary conversion.

This applies to livestock only in the excess of what you would normally sell. If you later replace the livestock, you may be able to postpone reporting the gain.

 Example. It is your usual practice to sell 50 of your dairy animals during the year. Due to the drought you sell 95 dairy animals the sale of 45 animals is treated as an involuntary conversion.

Information required includes:

* Evidence of the weather-related conditions that forced the sale.

* The gain realized on the sale.

* The number and kind of livestock sold.

* The number of livestock you would have sold under normal conditions.

Information required when you replace the livestock:

* The date you bought replacement livestock

* The cost of the replacement livestock.

*  The number and kind of the replacement livestock.

You may postpone all the gain if you purchase similar replacement livestock for the same or higher cost within the replacement period.
Key items:

* The replacement livestock must be similar to the livestock they replace. You cannot replace beef cattle for dairy cows.

* The replacement period begins on the day the livestock is sold.

*  The replacement period ends two years after the close of the first tax year in which you realize any part of your gain from the involuntary conversion. (sold in 2002, postpone gain until  2003, have until 12/31/05 to replace livestock)

If this drought persists and you have to make adjustments be sure to work with your tax professional so you have the required information to make the best out of a tough situation.
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Contact: Jack Davis, (605) 256-4151
** For links to other sites showcasing SDSU's work in teaching, research, and Extension, visit http://sdces.sdstate.edu.

Lance Nixon, Editor
AgBio Communications Unit
South Dakota State University
ACC, Box 2231, Rm 200
Brookings, SD 57007
Telephone: (605) 688-4653
Lance_Nixon@sdstate.edu