Livestock: Tax Implications of Selling Cattle During Drought

    Cattle producers in north Alabama are facing drought conditions. In extreme cases of drought, producers may have to reduce their herd size to take the stress off their pasture. Selling such a large number of cattle at one time can raise concerns about the tax consequences from these sales. Producers are often looking for ways to postpone or avoid these consequences. Ken Kelly, an Alabama Extension farm and agribusiness management agent, said that there are two tax options for producers to address this situation.

    “Producers whose main business is farming and who use a cash accounting system may choose to delay payment of capital gains on excess sales of livestock for one calendar year,” said Kelly. “This allows producers to distribute the taxes out and avoid abnormally large tax burdens in a year.”

    To be eligible for this postponement the county must receive a federal disaster designation from the producers.

    Kelly adds producers can be eligible for this postponement even if they sell their livestock before the declaration. The weather condition that caused the sale must be the same as the weather that caused the federal disaster designation.

    “Producers can only postpone the income that is above what their normal sales are,” said Kelly. “They cannot postpone the tax burden associated with the normal sale of livestock.

    Another option allows producers to postpone capital gains when they intend to replace the sold livestock at a later time. This is available only to those whose principal business is farming. However, producers don’t have to be in an a federal disaster area or be on a cash accounting system to be eligible.

    Kevin Burkett, who is on Alabama Extenion’s Farm and Agribusiness Management team,  said that there is a time limit to replace the livestock sold.

    “Producers have two years to purchase breeding livestock to replace livestock sold above normal levels during times of weather stress. Producers have four years if the area is a federal disaster area,” said Burkett.

    “Those who pay more for their replacement animals than they sold their originals for can use the overage as their tax basis for the following year,” said Kelly. “Producers who pay less for their replacement animals than they sold their originals for will be responsible for paying taxes on the difference.”

    Producers should check with their tax/accounting professional to see if these options are relevant to your operation.

    Declared primary disaster counties in Alabama are Blount, Cherokee, Dekalb, Etowah, Franklin, Jackson, Lamar, Limestone, Madison, Marion, Marshall and Morgan counties. Calhoun, Cleburne, Colbert, Cullman, Fayette, Jefferson, Lauderdale, Lawrence, Pickens, Randolph, St. Clair, Walker and Winston counties also received disaster status because of them bordering the primary counties.

    Producers can find a list of designated drought resistant counties and a link to the U.S. Drought monitor here.

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