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Wednesday, May 4, 2016

Drought may effect taxable income gain

Thursday, November 10, 2005

OREGON COUNTY _ Oregon County Extension ag business specialist Stacy Hambelton said last week that due to severe drought in Oregon County, livestock producers in the county may be able to postpone certain income gains that might affect their income tax.

"In August of this year, Oregon County, along with several other counties in southern Missouri, was designated as eligible for federal assistance due to the drought. This may allow farmers to postpone income," Hambelton said.

He said Code Section 451 (e) deals with situations where producers sell more livestock (including poultry) than they normally would because of drought, flood or other weather-related conditions.

"This would allow farmers to postpone recognizing the gain resulting from the sale of the livestock until the following year," he said.

Code Section 451 (e) provides for the one-year postponement of gain on the disposal of all classes of livestock. "This will apply only to a gain resulting from the livestock being sold and adding a more than normal gain to a producer," Hambelton said.

Hambelton said to qualify for section 451 (e) the following criteria must be met:

* The area must be declared eligible for federal assistance.

* The farmer's principal trade or business is farming.

* The farmer uses the cash method of accounting.

* The farmer can document their disposal or sale of more livestock during the year than they normally would have except for the weather-related condition.

Hambelton gave an example: "Jim Dandy normally sells 100 head of raised beef calves each year. As a result of the drought, Jim sells 150 calves on July 7, 2005, realizing $105,000 from the sale. On Aug. 23, 2005, as a result of the drought, the area was declared a disaster area eligible for federal assistance. If Jim meets the requirements of section 451(e) he can elect to postpone the gain ($35,000) on the sale of the 50 head of calves (those he would not normally have sold during the current year) to 2006."

He said he knew several situations in the county in which livestock producers had to sell cattle due to drought conditions.

Hambelton said another method of postponement farmers may need to know about is code section 1033 (e). "This provides for the postponement of gain on the sale of qualified livestock when the producer intends to replace the livestock at a later date. This also applies to only livestock sold in excess of the number a farmer would usually sell under normal business practices," he said.

Hambelton said to postpone gain under this provision, replacement property must be acquired within a specific period of time.

"The replacement period begins on the date the livestock were sold or exchanged. The replacement period generally ends two years after the close of the tax year in which the involuntary conversion occurred. The replacement livestock must be used for the same purpose as those disposed. Breeding stock must be replaced with breeding stock and dairy cows must be replaced with dairy cows and so on," he said. Hambelton said poultry does not apply for this provision.

For more information, contact Hambelton at the Oregon County Extension Office at 417-778-7490 or by e-mail at HambeltonS@missouri.edu.

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