In preparation for a shortage of grass some ranchers sold portions of their herd earlier in the year. A big increase in rain started to show improvement and gain optimism but then the blizzard Atlas hit in October and reports of dead livestock began coming in. For those that sold off some of their herd or lost cattle or calves the following information outlines several options to consider.
One Year Deferral/Replacement Elections
If livestock were sold at the beginning of the year due to drought conditions, any excess income received may be deferred to the following year. If the taxpayer resides in a county eligible for federal assistance, any excess income from livestock used for breeding, drafting or dairy purposes can be deferred and the livestock replaced within a four-year period. The income would then be taxable when the replacement livestock were sold. Notice 2013-62 lists the counties that qualify for an extension of this four-year period for another year. If the rancher had deferred the income due to drought and was previously required to replace the livestock by the end of 2013, he has until the end of 2014 as long as the county in which he resides is listed in this notice.
If the rancher held out until the rains came and was not forced to sell due to the drought, he may have lost huge numbers of livestock in the blizzard compared to the rancher that sold off some of his herd earlier in the year. If a rancher had insurance that covered the loss of raised livestock, the insurance proceeds must be reported as income unless the gain is deferred and the livestock are replaced within a two-year period. The cost of the replaced livestock must be at least as much as the proceeds received.
Ranchers that lost only raised livestock in the blizzard cannot deduct a casualty loss. All expenses were deducted on the cash basis and the taxpayer has no basis in the livestock. If the livestock were purchased and they hadn’t been fully depreciated, the remaining basis less any reimbursement can be deducted as a casualty loss.
The blizzard has been declared a disaster eligible for federal assistance. If the rancher has a deductible casualty loss from the blizzard, he has the option to deduct the loss in the current year or the previous year. Claiming a qualified disaster loss on an amended tax return for the previous year could lower the tax for that year and allow the taxpayer to receive a refund.
Net Operating Losses
Deducting the losses in the current year, may generate a net operating loss. NOL’s attributed to a federally declared disaster are automatically carried back three years unless the taxpayer elects to waive the carryback period. If the taxpayer has a current year NOL attributed only to farming income and expenses, the NOL is automatically carried back five years unless the taxpayer elects to waive the carryback or disregards the five year carryback and treats the loss as a regular NOL and carries it back two years. The taxpayer will want to look at prior year returns and apply the NOL against the tax years where it will benefit them the most. He will need to determine what options are available for the type of NOL generated and make the appropriate elections.
Farm Income Averaging
Another option that the rancher has is farm income averaging. The taxpayer can spread farm income from the current year evenly over three years to compute tax for the current year. This can be an advantage if the taxpayer’s income fluctuates and some of the years had no income or very little income reducing the current year income tax.
For the ranchers that lost cattle in the blizzard, a “Rancher’s Relief Fund” has been set up. Also, a rancher from Montana set up “Heifers for South Dakota” to accept livestock and cash to be used to purchase livestock. Livestock would then be donated back to ranchers who lost large portions of their herds. If a rancher receives livestock or cash donations from these charitable organizations, how is this reported on a tax return? Payments to individuals affected by a disaster are nontaxable gifts to the recipient as long as they were made to help individuals pay for basic needs and the organization was not legally required to pay them any money. If cash or other forms of assistance, such as livestock, are received that are considered reimbursement or replacement for lost property, any casualty losses must be reduced by the reimbursements received. A taxpayer cannot claim any deduction to the extent that the payments were excluded from income.
This will be a complicated tax year for farmers and ranchers and they need to look at the different tax planning strategies available depending on their situation. Be sure to contact your tax advisor before year-end if you have any concerns.