Many Ranchers Can Defer Livestock Sales for Another Year

One of the provisions of the Internal Revenue Code allow ranchers and farmers to defer the excess sale of livestock due to drought.  This deferral is normally four years, however, if your operation is located in a county that is still in a drought situation (or any contiguous county) during the current year, you are allowed to defer for another year until the county exits the drought situation.  This deferral does not defer the tax; rather, it allows you extra time to wait to reinvest into other livestock once the drought is past.

In IRS notice 2016-60, the IRS issued the list of counties that qualify under this provision for this year.  Many counties in the US have been on this list for several years.  I believe there may even be some counties that have now allowed up to a 10 year deferral.

To take advantage of this provision, you must reinvest into similar livestock.  In cases, where the drought continues and it appears that the ranch or farm may not be economically feasible to continue the ranching operation, the farmer or rancher is then allowed to reinvest into farm equipment.

To determine the amount of excess livestock, the rancher must calculate the average number of head sold in the last three years and only the excess over this average can be deferred.  Let’s look at an example:

Assume Rancher Edwards sold 150 head in 2015, 175 head in 2014 and 200 head in 2013.  His average is 175.  In 2016, Rancher Edwards sells 400 head due to the drought for $800,000.  His excess if 225 head (400-175) at an average cost of $2,000 ($800,000 / 400) equals $450,000 that he can defer for four years (2017-2020).  If he still has not reinvested the proceeds in 2020 and his county (or any contiguous county) is listed for that year, he is allowed to defer to 2021 (and so one until the county is no longer listed).

  • Principal
  • CliftonLarsonAllen
  • Yakima, Washington
  • 509-823-2920

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 partner with CliftonLarsonAllen in Yakima, Washington, as well as a regular speaker at national conferences and contributor at Raised on a farm in central Washington, he has been immersed in the ag industry his entire life, including the last 30 years professionally. In fact, Paul drives combine each summer for his cousins and that is what he considers a vacation.

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Here’s a question; if they can defer for four years, and at the end of that point and by Dec 2020 they still have not reinvested the excess cull money from 2016, but our period to amend 2016 has come and gone, how do we then reflect the recognition of the income for tax purposes?

You are required to go back and file an amended tax return and pay the tax plus interest (the statute is still open in this situation)

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