Farm Progress

Ag business specialist offers help with making income tax decisions in a drought year.

November 28, 2018

3 Min Read
TIME FOR TAXES: Farmers and ranchers will sit down and start calculating end of year taxes. However, this year’s drought is throwing a wrench in the process.wutwhanfoto/Getty Images

By Joe Koenen

Many Missouri farmers and ranchers experienced drought this year, and for some this was the second consecutive year. The water situation was severe this year, causing several livestock owners to sell animals. Even though farm income may be lower in 2018, income tax management could be crucial.

Income tax management is the bottom line in all these decisions this year. Allowing the deferral of income does not mean that a farmer has to, or even should.

Some farmers will have increased income due to sales above what they expected, while others may not. Individuals will need to decide if income next year will likely be higher and adjust accordingly. Here are some issues to consider.

Breeding livestock. The IRS allows a livestock producer two years from the end of the year in which the disaster occurred to replace those livestock without reporting the gain. A farmer or rancher has four years in the case of a federally declared disaster, which will include several counties in Missouri for 2018.

But there are restrictions.

1. The livestock must be replaced by like-kind livestock. So beef for beef and not dairy for beef or sheep for beef. Bred heifers would qualify.

2. Sporting livestock, i.e. pleasure horses, would not qualify.

3. Only livestock above normal sales qualify for the postponement.  For example, a farmer normally sells 25 cows, but is forced to sell 40 cows in 2018 due to drought. The farmer can postpone the gain received on 15 head (40 minus 25). The other issue to remember is the farmer could face paying a difference if prices are higher. So, selling a cow at $800 allows that income to be postponed, but if that replacement costs $1,200 then the farmer still has to come up with the $400 difference.

Non-breeding livestock. A taxpayer can postpone the gain for one year on the number of animals above normal sales. No federal disaster declaration is necessary, and it applies to all classes of livestock. The taxpayer's principal business must be farming (two-thirds of gross income from farming/ranching) to qualify. The taxpayer must show the normal sales to demonstrate the number to postpone.

Again, an example is a farmer normally sells 50 calves in a normal year but due to this year's drought was forced to sell 90 calves. The farmer can choose to postpone the income on the 40 calves (90 minus 50) until next year. Both the breeding and non-breeding livestock must have been sold because of weather-related conditions (drought in this year's case). A short explanation of the disaster (when declared if applicable, drought, etc.) must accompany the tax return.

Crops. Crop rules are similar to the non-breeding livestock rules.

A farmer can postpone the income for one year assuming that is his or her normal business practice. Determination can be made by crop. So, if a farmer sells beans in the following year but feeds corn, the bean income could be deferred to next year if it is a normal way of selling. Again, the farmer will have to prove this is a normal business practice and not just to defer income.

Doing a tax estimate yourself or with your preparer is very important considering this year's drought as well as new tax laws. County extension offices will have the Farmer's Tax Guide (IRS publication 225) available around the beginning of December. If there are individual income tax questions, contact your agricultural business specialist.

Koenen is an ag business specialist with the University of Missouri Extension. He writes from Unionville, Mo.

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