The drought disaster declaration has given livestock producers in many areas options for deferring income from livestock sales in 2012, says University of Nebraska Extension specialist Aaron Berger. Citing a webinar on livestock deferral elections presented by Tina Barrett, executive director from Nebraska Farm Business Inc., Berger says producers have two deferral options.
The first is a one-year deferral of income from cattle sold in 2012, with the income reported in 2013. This option requires that a producer reports income on a cash basis, and secondly, it must be a normal business practice to sell livestock in the following year. For example, a producer who normally would sell 2012 spring-born calves in January 2013 might have sold them in October 2012 due to drought. The income from cattle sold in 2012 that would be eligible for deferral to 2013 would be based on the difference between the number of head the producer sold in 2012 and the three-year average of the number sold in 2011, 2010 and 2009.
The second opportunity is for a deferral for breeding livestock. To utilize this opportunity, producers would need to calculate the normal or average number of sales of breeding livestock that they had over the past three years. Breeding livestock sold in 2012 in excess of the average of this number would be eligible for a four-year deferral during which the producer could purchase back like-kind breeding livestock to replace those sold in 2012. If the drought continues and a producer is not able to buy back like livestock at the end of those four years, a producer could also use that money to buy equipment or other assets that would be used in the operation. Property such as land or real estate is not eligible as a buy-back option.
Since raised breeding livestock is currently taxed at capital gain rates of 0 percent or 15 percent, depending upon your tax bracket, deferring gain on these sales for replacement with like breeding livestock will reduce the depreciable basis on them and also reduce the amount of depreciation available to offset future self-employment income tax. It is likely capital gains tax rates are never going to be lower than they are now.
The other option that farmers and ranchers need to consider is income averaging. This tool averages the income in 2012 with the incomes from the prior three years. This tool can significantly reduce tax liability for some situations.
Before pursuing any of these options, Berger recommends visiting an accountant to determine whether they offer an advantage in 2012 or in future years.