Tax Options for Drought Sales of Livestock
If a producer is forced to sell livestock, in excess of normal levels, due to shortages of water, feed or other consequences of drought, the income tax on the gain from the sale of those animals may be postponed. Producers have two distinct options tax options available to them in this circumstance;
1. Code Section 451(e): The election to postpone reporting the taxable gain on the additional sales of any livestock for one year; or
2. Code Section 1033(e): The election to postpone, and altogether avoid, paying taxes on the gain from the sale of breeding, draft, or dairy animals if they are replaced within a specified time frame.
Code Section 451(e): Provides for the one year postponement of gain on the sale of all classes of livestock.
What requirements must I meet as a producer?
In order to qualify for this election a producer must meet the following criteria:
- Their principal business must be farming.
- They must use the cash method of accounting.
- They can show that under usual business practices, they would not have sold or exchanged the additional animals this year except for the weather-related condition.
- The weather-related condition caused an area to be designated as eligible for assistance by the federal government.
How do I make the election?
The 451(e) election must be made by the due date of the tax return for the tax year in which the sale occurred, and the following information should be attached to the statement:
- A declaration that the producer is taking an IRS Code Section 451(e) exemption.
- Evidence of the weather-related conditions that forced the sale of the animals.
- The number of animals sold under normal business practices during each of the past three years.
- The number of animals that would have been sold during the current tax year had the producer followed their normal business practices.
- Information verifying that the area was designated as eligible for federal disaster assistance, and that date at which that designation was received.
- Computations, consistent with IRS requirements, to show the amount of income that is being deferred until the next year.
For more answers to your questions on Tax Options for Drought Sales of Livestock, download the NCBA tax document here.