Tax Implications If Liquidating a Beef Herd

Tax Implications If Liquidating a Beef Herd

Cows and calves grazing
If liquidating due to drought, sales income may be postponed for up to two years. Photo credit Troy Walz.

After calving and going to spring grass this year the word drought was used quite often. With other States to the west of Nebraska liquidating cows from the herd it sounded like it could hit Nebraska. Different portions of Nebraska were in different severity of drought this year and questions were raised about the tax implications to consider when liquidating cows.

Sales income from liquidating cows would be taxable minus any depreciable value left on purchased animals. If liquidating due to drought, sales income may be postponed for up to two years. The idea here is that if you plan to use the sales proceeds to buy back assets used in the farming/ranching enterprise, including the purchase of replacement cows, it gives you time to do it. From a tax standpoint, this ends up working sort of like a like-kind exchange.

Perhaps, the biggest thing to consider about selling off part or all of a cowherd, especially if you raised all of the cattle, is the marginal tax rate(s) that will apply to the income.  A large flush of income could push you into some very high marginal tax brackets.  It is a much better tax outcome if you can spread sales out over multiple tax years or manage it in such a way so you do not have a significant amount of income subject to the higher end of the tax rates.

Of course, people should consult with their tax advisor before committing to liquidating a significant number of cows. The best online/print resource is the IRS Publication 225. Under The Farm Income topic there is a section on Sales Caused by Weather-Related Conditions that may be applicable.

To summarize, two big tax-related items to consider if you are thinking of liquidating part or all of a beef cow herd are: (1) whether you plan to re-invest the cash inflow from liquidation back into the farm/ranch in the next two years; and, (2) reducing exposure to high marginal tax rates that would negatively impact the financial outcome from the liquidation process.


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