Livestock producers who are selling animals this year because of a shortage of grazing, water or other effects of the drought should remember payment of income tax on the taxable gain from sales may be postponed, says Mike Hardin, Oklahoma State University Extension tax specialist.
Postponement of taxes payable can come under two separate tax law provisions. Both apply only to drought-related sales of livestock in excess of a producer's normal business practice in a year, Hardin emphasizes.
A producer's election to postpone gain by purchasing replacement livestock within two years applies to breeding, dairy or draft animals.
Election to postpone reporting taxable gain until the subsequent year applies to all classes of livestock, including animals that eventually will be finished for slaughter.
The replacement livestock purchased within the two-year period must be used for the same purpose as the animals that were sold. A producer won't qualify for postponement by replacing dairy cows with beef cows, Hardin notes.
In addition, a producer must show that drought caused the sale of more livestock than otherwise would have been sold. Only the sales in excess of normal yearly sales will qualify for the deferment provisions.
Hardin explains a producer's election to defer payment of tax on sales gain by purchasing replacement livestock is made by not reporting the deferred gain on this year's tax return and by attaching a statement to the return showing all the details of the involuntary sales.
Those details should include:
* Evidence of existence of the drought conditions that forced the sales.
* A computation of the amount of gain realized on the sales.
* The number and kind of livestock sold.
* The number of livestock of each kind that would have been sold under usual business practices.
To qualify for deferring taxes on sales proceeds of any kind of livestock until the subsequent year, a producer must show the animals normally would have been sold in the next year.
Also, a drought that caused an area to be declared eligible for federal assistance must have caused sale of the animals.
How To Proceed The producer's election must be made by the due date of the tax return, including any extension, for the tax year in which the drought-affected sale occurred. The election can be made by attaching a statement to the return that includes:
* A declaration that the taxpayer is making an election under IRS Code Section 451(e).
* Evidence of existence of the drought conditions that forced the early sale.
* The total number of animals sold in each of the three preceding years.
* The number of animals that would have been sold in the taxable year under normal business practices.
* The total number of animals sold and the number sold because of drought during the taxable year.
* A computation of the amount of income to be deferred.