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Ali Eddy, Author at Ketel Thorstenson, LLP

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September 20, 20170

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.


October 28, 20140

Atlas_3[1]With last week’s beautiful fall weather, it’s hard to believe that just one year ago farmers and rancher were still reeling from the effect of Atlas, the most devastating blizzard in decades to hit western South Dakota and the Black Hills. The storm rolled in from Wyoming during the first week of October and dumped nearly 3 feet of heavy, wet snow.

Tens of thousand of cattle, sheep and other livestock perished in the October 2013 blizzard. (We saw one estimate that put the loss at more than 70,000 animals.) Because they lost cows and other breeding stock, these ranchers will suffer lost income for years.

For this and other reasons, farmers and ranchers need to be doing more tax planning than usual this year, according to a recent KT Addition newsletter story by Michael Finnegan and Peter Bergman, Rapid City CPAs and partners in Ketel Thorstenson LLP.

When Congress finally passed the 2014 Farm Bill, it included catch-up provisions for 2012 and 2013. The bill also provided for payments due to losses from Atlas. In other words, ranchers and farmers have three years of income to report in 2014.

There are tax considerations for replacing livestock, deferring crop insurance proceeds, income averaging and more. Check out the full article on the website or in the upcoming Fall KT ADDITION, hitting mailboxes this week.