By Tina Barrett and Jessica Groskopf
After drought and wildfire strike, the financial decisions producers make can have lasting tax consequences. This installment of Nebraska Recovery Roundup reviews some of the tax planning tools farmers and ranchers should consider.
Livestock sales
One of the biggest decisions involves livestock sales. Producers often sell animals earlier or in greater numbers. Fortunately, the tax code provides several options that may help reduce or postpone the tax liability of such decisions.
The first option is a one-year income deferral. Cash-basis farmers and ranchers whose primary business is farming may be able to postpone reporting income from excess livestock sales caused by a weather-related event. To qualify, producers must show that they sold more livestock than normal because of the disaster. Typically, a three-year sales history is used to establish what "normal" looks like.
A second option allows producers to defer gains by replacing livestock. This provision applies only to breeding, dairy, or draft animals. It does not apply to feeder livestock or poultry. Rather than simply postponing income, producers can defer recognizing the gain if they replace the livestock within the required time frame. In most cases, replacements must occur within two years, although producers in federally assisted disaster areas often receive four years, with additional extensions available during prolonged drought.
While these provisions can be valuable, deferring income is not automatically the best strategy.
Source : unl.edu