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The IRS has announced a one year extension to the rule that allows farmers and ranchers who sell more livestock than normal due to drought and defer any gain on the excess livestock sales.

Farmers and Ranchers Hit by Drought Get More Time to Replace Livestock

  • 11/19/2012

Farmers and Ranchers Hit by Drought Get More Time to Replace Livestock

The IRS recently announced that farmers and ranchers who sell more livestock than normal due to drought may elect to defer any gain on the excess livestock sales. Absent any extension provisions, they have up to four years to replace the livestock. Livestock eligible for this gain deferral include draft, dairy, and breeding stock. Sales of other livestock, such as those raised for slaughter, held for sporting purposes, or poultry, are not eligible.

Example of gain deferral

Karl is a rancher who sold an extra $100,000 of his breeding herd livestock in 2008. Under the four-year provision, he had until December 31, 2012, to purchase $100,000 of like-kind livestock to completely defer the gain. Any amount less than $100,000 invested in replacement livestock creates a gain taxed in 2008; the IRS charges interest expense from the due date of the 2008 tax return until the tax on the gain is paid.

Extended period for replacing livestock

The IRS announced in Notice IR-3012-72 that an automatic extension of one year is granted to any farm or ranch located in a county, parish, city, or district listed as suffering exceptional, extreme, or severe drought conditions by the National Drought Mitigation Center (NDMC), during any weekly period between September 1, 2011, and August 31, 2012. Any county contiguous to a county listed by the NDMC in IRS Notice 2012-62 also qualifies for this relief.

Therefore, if your four-year period (in some cases this could be longer) was originally scheduled to expire on December 31, 2012, and your county or a contiguous county is one of those listed in IRS Notice 2012-62, you now have until December 31, 2013, to replace the livestock sold. Because the normal drought sale replacement period is four years, this extension primarily affects drought sales that occurred during 2008.

Who is affected?

There are 43 states listed in IRS Notice 2012-62. Each state has several counties that are affected.

How we can help

Even though you now have another year to replace these livestock sales, it may make sense to recognize income in the current year. With the scheduled Medicare surtax applying to certain income beginning in 2013 and other potential self-employment tax savings arising from deducting the livestock purchased (that is not available with a deferral), this may be the year to report those sales. In addition, the sale of raised breeding herd held for at least 24 months generates capital gain, and the purchased replacement animals generate ordinary deductions.

Contact your CliftonLarsonAllen tax advisor to discuss your situation before this additional time period expires.

Paul Neiffer, Agribusiness Partner or 509-823-2920