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Drought Tax Laws May Benefit Livestock Producers in 1998

Farm Business Management Update, December 1998

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 1998 due to the drought conditions across most 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 choose to defer income to the next tax year, 451(e) election. These tax management tools may help to level revenues over time resulting in a reduced tax liability for the 1998 tax year, which has been one of the worst financial years for farmers in recent years 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 1998 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 1998 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 1998 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 1998 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 sale 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 greater 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 have been declared a disaster area. In many Virginia counties having numerous livestock and dairy operations, this tax option is 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 provides 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 the details and requirements associated with these two tax laws. Whether you take advantage of these provisions will depend on your actual 1998 and expected 1999 tax situation. Also, the new income averaging provision available to farmers in 1998 may complicate the decision to claim one of these two drought-related provisions. Farm families should estimate their net farm incomes prior to the end of the year so that they can make more informed decisions regarding the timing of livestock sales to reduce their 1998 income tax burden. By early January, IRS Publication 225, Farmers Tax Guide, which includes detailed information regarding these and other agricultural tax issues, should be available at local Extension offices as well as other locations.

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