There’s Always a LightWritten by Dennis Sun
Published: 22 September 2012
During the last month of county fairs and the State Fair, the three main topics people talked about were drought, drought and drought. Some forecasts say that it looks like this high pressure will last for a while yet, but others are predicting above average snowfall for most of the state this winter. Remember, weather guys only have to be right 50 percent of the time, so we all need to plan for the worse and hope for the best.
But even in the darkest days, there is always some light, and the light in this case is Section 451(e) and Section 1033(e) of the tax code. These sections deal with not having to pay taxes on the sales of livestock that are over and above a normal year for one to four years because of drought. Now realize, I’m not a tax expert, but this is how I read it. You must visit with your accountant or CPA if you are even thinking about this, I’m just telling you about the opportunity that is out there and most of you are already aware of it I hope.
Code Section 451(e) is the election to postpone reporting the taxable gain on additional sales of any livestock for one year, and Code Section 1033(e) is the election to postpone, and altogether avoid, paying taxes on the gain from the sale of breeding, draft or dairy animals if they are replaced within a specified time frame.
Code Section 451(e) provides for the one year postponement of gain on the sale of all classes of livestock and to qualify, your principal business must be farming/ranching and you must use the cash method of accounting. To make the election, it must be made by the due date of your tax return for the tax year in which the sale occurred and the following information should be attached to the statement: a declaration that you, the producer, is taking an IRS Code 451(e) exemption; evidence of the weather related conditions that forced the sale of the livestock; the number of animals sold under normal business practices during each of the past three years; the number of animals that would have been sold during the current tax year had you, the producer, followed your normal business practices; information verifying that the area was designated as eligible for federal disaster assistance; the date at which the designation was received; and computations consistent with IRS requirements to show the amount of income that is being deferred until the next year.
The 1033(e) is available to all taxpayers – not just cash-basis taxpayers – whose principal business is farming or ranching. If your area is eligible for federal disaster assistance, the replacement period begins on the date that the livestock were sold and ends four years after the end of the tax year in which the involuntary conversion occurred. You could replace livestock with other farm or ranch property, but the IRS has to approve if it is feasible to do so.
Hopefully this gives you an idea what is available to you. Contact your accountant for the real facts on what you should do – this bunkhouse accountant isn’t too credible.