IRS Issues 5th Update of Extreme Drought Areas for Extended Livestock Replacment Period
The IRS has released the fifth annual list (published each September) of counties or parishes in which exceptional, extreme, or severe drought has been reported during the preceding 12 months. This list can be used instead of the U.S. Drought Monitor maps to determine whether an extended replacement period applies for livestock sold because of drought.
If a rancher sells livestock due to drought, the rancher is allowed a certain number of years to replace this livestock with new livestock and report no gain from the sale. This period is normally four (4) years, however, if the county where the ranch is located is still subject to drought during the three years preceding this four year term, then the time to replace the livestock is extended until the county has been drought free for a year. The first drought-free year is the first twelve month period that :
- ends on August 31
- ends in or after the last year of the taxpayer’s 4 year replacement period; and
- does not include any weekly period for which exceptional, extreme, or severe drought is reported for any location in the applicable region.
In brief, the rancher is allowed a full year after the county is completely drought free before the rancher is required to purchase their livestock to replace the herd sold. In some cases, the rancher may have five or ten years to replace the stock if the county has extreme drought for at least one week in each year during this time period.
The rancher can either look at the Drought Map to determine whether this applies or just review the IRS notice that is prepared each September.
If this situation applies to you, check with your tax professional to see how much time you have to replace your livestock without incurring a tax penalty.
Paul Neiffer is a certified public accountant and business advisor specializing in income taxation, accounting services, and succession planning for farmers and agribusiness processors. Paul is a principal with CliftonLarsonAllen in Walla Walla, Washington, as well as a regular speaker at national conferences and contributor at agweb.com. Raised on a farm in central Washington, he has been immersed in the ag industry his entire life, including the last 30 years professionally. Paul and his wife purchase an 180 acre ranch in 2016 and enjoy keeping it full of animals.
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