Drought Tax Laws May Benefit Livestock Producers
Farm Business Management Update, August 1999
By Jack Dunford of the Department of Agricultural and Applied Economics, Virginia Tech
The federal tax code includes two provisions, sections 1033(e) and 451(e), which may benefit livestock producers who have been forced to sell larger numbers of livestock than normal during 1999 due to the drought conditions across much of Virginia. These provisions of the tax law allow farmers to either postpone gain by purchasing replacement animals within two years, 1033(e) election, or to defer income to the next tax year, 451(e) election. These tax management tools available under the law may help to level revenues over time resulting in a reduced tax liability for the 1999 tax year, which has been one of the worst years financially for farmers due to drought as well as low commodity prices.
If a farmer elects to postpone the gain on excess draft, breeding, or dairy livestock sales, he must have the records to demonstrate that he sold more livestock in 1999 due to the drought compared to recent normal years. For instance, if a beef cattle producer normally sells 15 cull cows per year, but in 1999 was forced to sell 35 cows due to lack of feed supplies, he can elect not to report the gain on the additional 20 cows for the 1999 tax year. However, within two years he must purchase replacements and adjust the basis of the newly purchased cows accordingly. If the replacements are not purchased in the prescribed time, the taxpayer must file an amended 1999 return, include the income from those 20 cows, and pay the tax. No disaster declaration is required to qualify for this provision.
The other election is to defer the sales of any livestock (including mature producing animals or feeder/stocker livestock) to the next tax year. This provision would be more suitable in the situation in which higher than normal numbers of feeder cattle, lambs, etc. are sold due to the drought. As with the other provision, only the income from the number of animals sold during the year exceeding the normal number can be carried over to the following tax year. For livestock producers to take advantage of this election, the county must be declared a disaster area. In many Virginia counties having numerous livestock and dairy operations, these tax provisions are the most important advantage of being declared a disaster area, since the majority of farmers are not interested in nor will they be eligible for disaster loans from the federal government.
This report is only a cursory review of these two tax provisions. Farmers should contact their personal tax professional or consult with an Extension farm business management agent to gather all the details and requirements associated with these two special provisions of the tax law. Whether to take advantage of these provisions will depend on your actual 1999 and expected 2000 tax situation. Also, the income averaging provision for farmers (available only in 1998, 1999, and 2000) should be considered as an alternative to making either or both of these drought-related elections. Farm families should estimate their income tax situation during 1999 so they can make wise management decisions resulting in reduced tax liability during this difficult financial period.
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