Drought-hit producers are encouraged to take advantage of special IRS provisions for weather-forced livestock sales.
The drought of 2011 – the worst in Texas history and nearly as horrendous for much of the Southwest – forced ranchers to liquidate hundreds of thousands of cows and other cattle for lack of pasture, hay and/or water. But that unexpected and unwanted windfall in revenue likely won’t face terrible tax requirements, says a Texas AgriLife Extension economist.
Stan Bevers, AgriLife Extension economist in Vernon, says the Internal Revenue Service (IRS) will cut producers some slack in such situations.
"We had a lot of cowherd liquidation in 2011,” he says. “As we enter 2012, many ranchers find themselves flush with cash because of all of the cows they’ve sold. A lot of those ranchers are wondering about federal income tax implications.
“They’re wondering if they have to declare all of that as 2011 income. The answer is no.”
Bevers says ranchers who faced liquidation can defer some of the tax on the gain by using IRS Section 1033. “The proceeds from the sale of breeding cows due to drought have to be used to repurchase the same type of females within four years,” Bevers says.
He adds that drought-hit ranchers who were forced to sell weaned calves last year that would have normally been sold this year may also take advantage of deferring that income to this year.
“They can defer that income if they had to sell early,” Bevers says. “They can use IRS Section 451. There are a lot of specifics involved if ranchers use this deferral method. But when they get with their accountants, they should be able to determine the best approach.”
Replace with early profits in mind
Bevers says winter and spring rains may leave producers eager to start buying replacements. He advises them to study markets and calving probability before writing a check.
“We know we’re going to see some really good prices for calves in the next three years,” he says. “So I want a female with a high probability that it will put a calf on the ground and get one weaned.
“Sometimes producers want to buy young females, 2-3 years old, for longevity. But those females don’t have the highest probability for reproduction in the near term. A middle-aged female probably has a higher calving probability than either a younger female or an aged female.”
With the record highs for females and bred heifers, he urges producers to be prudent in their replacement decisions.
“Don’t miss out on this open gate for the next couple of years, let’s make sure we have calves to sell,” he says.