AMARILLO – Extreme weather conditions in 2011 caused havoc for Texas agricultural producers with property damage and forced early livestock liquidations, according to a Texas AgriLife Extension Service specialist in Amarillo.
Such unplanned events often create more revenue than usual in a given year, generating income tax issues, said DeDe Jones, AgriLife Extension risk management specialist in Amarillo and co-author of a newly released publication.
The publication, “Texas Panhandle Producers Face Tax Implications from Drought-Related Losses,” will help producers walk through several scenarios as they sort through the many decisions they will face at tax time, Jones said.
“Wildfire and drought losses are subject to special tax treatments, and producers need to be aware of the implications,” she said. “In a typical year, gain on property loss reimbursement or the sale of livestock is subject to taxes. However, additional options are available for those who experienced wildfire destruction or were forced to sell cattle due to extreme drought conditions.”
Three tax alternatives apply to property insurance indemnities and cattle liquidations in excess of normal business practices, Jones said.
- IRS Forms 4684 and 4797 allow producers to postpone reimbursement gains for up to four years.
- IRS code 1033 pertains to draft, breeding or dairy animals that will be replaced within a given time period.
- IRS code 451 allows a one-year postponement in reporting sales proceeds on raised livestock.
Reporting casualty losses on IRS Forms 4684 and 4797 allow farmers and ranchers to defer any gains that result from insurance reimbursements for fire-related losses associated with fences, equipment and other property, Jones said.
Producers have up to two years under normal circumstances and four years during times of disaster to utilize any money received for property restoration or replacement, she said.
The replacement period begins on the date their property was damaged, destroyed or stolen and ends two or four years following the first tax year in which the gain is realized, Jones said. The four-year option is available only to those located in a federally declared disaster area.
To be eligible for deferment, producers must attach a statement to their tax return indicating the date and details of their casualty, the amount of insurance or other reimbursement received, how the gain was calculated, and proof of a disaster declaration, she said.
Under the 1033 election, drought liquidations of breeding livestock are considered involuntary conversions of capital equipment, Jones said. Gains can be postponed for up to two years in typical circumstances and four years during times of disaster if animals are replaced. The county must be declared a disaster area.
All replacement cattle should be used for the same purpose as the livestock that was sold, she said. For example, beef cows must be replaced with beef cows. The taxpayer also has to show that adverse weather conditions caused the sale of more livestock than normal. Gain postponement is only allowed on those animals sold because of the unfavorable weather.
To be eligible for a 1033 election, producers must attach a statement to their tax return indicating the existence of an adverse weather-related condition, proof of a disaster declaration and documentation listing the amount of gain realized on liquidated cattle, Jones said. They should also show the amount and kind of livestock sold or exchanged, and estimate the number of animals typically sold or exchanged under normal weather conditions.
Section 451 allows cattle owners to postpone gains for one year on raised livestock only. To qualify for this election, taxpayers must show that their principal business is from farming or ranching and use the cash method of accounting, Jones said.
They should also demonstrate that the livestock would normally have been sold at a later date but were liquidated early due to drought, she said. Additionally, they must provide proof that the sale of livestock was caused by weather conditions from a region officially declared a disaster area.
The liquidation can take place before or after a disaster is declared as long as the same disaster caused the sale, Jones said. Income can be postponed only on those cattle liquidated as a result of weather-related causes.
A copy of the publication, along with other drought resources, can be found at http://agecoext.tamu.edu/drought.
Producers are encouraged to contact a tax accountant to determine the selection that best fits their operation and business plan, Jones said.