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Special Tax Elections for Farmers and Ranchers

If you have been following the weather so far this year, you may have noticed it’s much drier than usual. This past winter, the snowfall was less than normal, and the rain storms this summer have been few and far between. You may have guessed it. Yes, we are in a drought. This affects all of us but hits the farm and ranch community hard. Many ranchers are forced to sell off their current year crop of livestock sooner than normal or even some of their breeding stock because their pastures and hay fields didn’t produce enough to feed them. Also, farmers who lose their crops and receive insurance proceeds can end up with a large increase in taxable income because they are not able to defer the income to the following year when their crops are usually sold. Luckily there is tax relief that can help out.

Producers may be forced to sell livestock earlier or sell more of their herd than usual which can cause a big increase in taxable income compared to a normal year. The tax law allows two different deferral options that can help smooth out income so they don’t have a huge tax burden in one year.

The first deferral option is an election to replace breeding, draft, or dairy livestock sold because of poor weather conditions, loss of pasture, bad water, etc. This allows the producer to defer any gain as long as the livestock are replaced within two years after the year of the sale. If the producer’s county or adjoining county receives a federal disaster designation, the replacement period extends to four years. Only livestock sold exceeding the amount sold on a normal year qualify for the deferral. For example, if the producer normally sells five cows and during the drought year the producer sold ten, only the additional five would qualify for the gain deferral. By making this election, any gain that was realized on the sale of the livestock is not taxable but would reduce the basis of the replacement livestock. The producer must replace the livestock with “like-kind” livestock (cows for cows, bulls for bulls). If, however, after the two or four year period weather conditions make replacing the livestock not feasible, the producer can replace the livestock with any property used in the farming/ranching business except for land.

The second deferral option is an election to defer income from the sale of any livestock (including a calf crop) exceeding the number of animals the producer normally sells in a year to the following year. In order for this election to be available, the producer must be in an area that was designated as a federal weather related disaster area, and the weather related conditions are what caused the sale of the livestock. To be eligible, farming must be the principal business of the taxpayer and normal business practice includes the sale of the livestock the following year.

Both of these elections have a maximum number of livestock that can be deferred but not a minimum, so each deferral can be tailored to fit a particular tax situation. Elections can be made up until the extended due date of the tax return (October 15), but tax owed is still due at the time of extension (April 16) to avoid interest and penalties.

Farmers also have some options when it comes to crop insurance proceeds. They can elect to defer the income from crop insurance received for crop damages or destruction to the following year if it is normal practice of the producer to sell or consume that crop the next year. All crop insurance proceeds for the current production year must be deferred even if it is normal practice to sell one particular crop the current year and the other the next year. This election does not provide much flexibility; it is either all or none.

Give the KTLLP Ag Team a call today to further discuss these rules and your particular situation.

Brady Larsen

Brady Larsen

Manager at Ketel Thorstenson, LLP
Brady is a 2009 graduate of South Dakota State University and also studied accounting at Black Hills State University. He joined Ketel Thorstenson in January of 2012 and is a Manager in the Tax Department.
Brady Larsen

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