What is in this article?:
- IRS Regulations Give Drought Stricken Ranchers A Break
- Don't replace until you're ready
Internal Revenue Service Section 1033 provides livestock producers with flexibility in having to declare these sales as income for 2012.
It isn’t just ranchers in the Southwest who have been forced to sell off parts of their cowherds due to drought this year. Cattle producers in much of the Great Plains, Midwest and Southeast have also seen parched pastures that succumbed to the worst drought for many since the 1980s.
The droughts of 2011 and 2012 have led to liquidation of hundreds of thousands of cows and other cattle. The lack of native pasture, quality hay and/or water left ranchers no choice but to sell. However, this unexpected increase in revenue likely won’t create terrible tax requirements for a ballooning income resulting from cow sales, says a Texas AgriLife Extension economist.
Internal Revenue Service Section 1033 provides livestock producers with flexibility in having to declare these sales as income for 2012, says Stan Bevers, AgriLife Extension economist in Vernon, Texas.
“Many ranchers in Texas, New Mexico and Oklahoma had a lot of cowherd liquidation in 2011,” Bevers says. “As we entered 2012, many ranchers found themselves with excessive income because of all of the cows they had sold. Now, a similar situation is facing ranchers in other states, which suffered severe drought this year. More cows had to be sold.”
Many ranchers are wondering about federal income tax implications and if they have to declare all of the additional revenue received as 2012 income. Bevers says ranchers who faced liquidation can defer the tax on the gain by using IRS Section 1033.
“With this provision, producers can postpone the gain on the abnormal sales of breeding cows as income,” he says. “However, proceeds from the sales due to drought have to be used to repurchase the same type of females. But with Section 1033, a typical two-year designation can be extended to four years. ”
In addition, ranchers who were forced to sell weaned calves that would have normally been sold the following year may also take advantage of deferring that income.
“They can use IRS Section 451,” Bevers says. “Section 451 allows you to postpone recognition of income from one year to the next. There are a lot of specifics involved if ranchers use this deferral method. So producers need to consult with their accountants and other financial advisors to determine the best approach.”