"There are some laws already in place, but two particular deferral elections for livestock are becoming important these days," said Tina Barrett, executive director of Nebraska Farm Business Inc.
The first option is a one-year deferral that allows producers to file income received from cattle sold the year of the drought to the following year. For example, cattle sold this year won't be recognized as a gain until 2007, Barrett said.
Producers are given a second option to replace breeding livestock without recognizing a gain for the initial sale, Barrett said. In previous years, producers were given a two-year period to replace the livestock. Now that time period has increased to four years. "If it still isn't feasible to reinvest in livestock within four years, you can now invest that money in a different type of asset used for farming purposes. It doesn't let you invest in land, but you could take the money from the cows and invest it in a new tractor," Barrett said.
In order to claim a deferral, producers must be able to prove that the drought did cause a premature sale of livestock. Raising livestock in a county declared a federal disaster area is sufficient proof. For producers in other counties, proof such as the release of CRP land for grazing or haying is needed, Barrett said.
Producers should remember there are some instances where they may choose to recognize the income, Barrett said. "If the gain on the sale of livestock is deferred, capital gains today are reduced, but so is the tax basis in the replacement animals in the future. As a result, the depreciation expense allowed on those animals is also reduced. Therefore, a sole-proprietor is trading what could be a 5 percent federal tax for at least a 30 percent tax savings in the future," she said.
Drought conditions can cause an overall drop in a given year's income. In these situations, it may be necessary to show the gain from sale of livestock to avoid showing loss on tax returns, she said.
The important thing to remember is that situations and circumstances are unique, so it is beneficial to keep all options open and consult a tax professional, Barrett said.
Kalee Olson
IANR News
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