Options for Tax Planning for Livestock Producers Due to the 2012 Drought Disaster Designation

The Drought Disaster declaration has given livestock producers options for deferring income from livestock sales in 2012.

There are two opportunities for livestock producers to defer income due to livestock sales in 2012. The first is a one-year deferral of income from cattle sold in 2012 and not report that income until 2013. This opportunity is an option for all kinds of livestock; however, there are some requirements to be able to use this option. First a producer must report income on a cash basis and, secondly, it must have been a normal business practice to sell livestock in the following year. For example, a producer would normally sell calves in January, but due to drought conditions, sold 2012 born calves in October; after having sold 2011 born calves in January of 2012. The income from the number of head of cattle sold in 2012 that would be eligible for deferral to 2013 would be based on the difference between the number of head that they have sold in 2012 and the three year average of the number of cattle sold in 2011, 2010 and 2009.

The second opportunity is for a deferral for breeding livestock. To utilize this opportunity, producers would need to calculate the normal or average number of sales of breeding livestock that they had over the past three years. Breeding livestock sold in 2012 in excess of the average of this number would be eligible for a four-year deferral during which the producer could purchase back like kind breeding livestock to replace those sold in 2012 due to the drought. If the drought continues and a producer is not able to buy back like livestock at the end of those four years, a producer could also use that money to buy equipment or other assets that would be used in the operation. Property such as land or real estate is not eligible as a buy back option.

Before taking either of the deferral options, you should visit with your accountant to see if utilizing either is to your advantage in 2012 or in future years. Since raised breeding livestock is currently taxed at capital gain rates of 0% or 15% depending upon your tax bracket, deferring gain on these sales for replacement with like breeding livestock will reduce the depreciable basis on them and also be reducing the amount of depreciation available to offset future self-employment income tax. It is likely capital gains tax rates are never going to be lower than they are now.

The other option that farmers and ranchers need to consider is income averaging. This tool averages the income in 2012 with the incomes from the prior three years. This tool can significantly reduce tax liability for some situations.

Each person's tax situation and goals is distinctive to them. Please visit with your tax accountant to evaluate what options are available to you and then make plans accordingly. This planning is best done prior to year end, giving you the opportunity to execute options that can help you manage tax liability.

For related information, please see the "Tax Consequences to Drought" article from July 2012.

Aaron Berger, Extension Educator
Panhandle Research & Extension Center
University of Nebraska