Tax Insights

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Farmers and ranchers: Deferring gains on drought-affected livestock

As Arizona’s drought conditions continue, Arizona Farmers and Ranchers that have been affected benefit from the IRS rules regarding deferring gains on livestock they were forced to sell. The IRS publishes the regions affected by drought as determined by the National Drought Mitigation Center. Generally, when a farmer or rancher is forced to sell livestock solely due to drought, flooding, or other severe weather causing a region to be designated as eligible for federal assistance, they are required to replace the livestock within a four-year period to defer the gain. However, if the drought conditions continue to exist at the end of the four-year period, they are granted an extension until the end of the tax year after the first drought-free year to replace the sold livestock.

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This makes a lot of sense when you think about what the tax law is trying to accomplish. When the sole reason the farmer or rancher sold livestock that they would not normally have sold was because weather conditions made keeping the livestock not possible, forcing them to replace the livestock while the conditions continue would not make sense. I don’t always get to applaud Congress for getting something right, but this is one area where they used some common sense.

In order to qualify, the livestock that was sold must have been eligible for capital gain treatment. This means that livestock raised for slaughter or held for sporting purposes, or poultry would not be eligible. In addition, as stated above, the sale must have been solely due to drought, flooding or other eligible severe weather causing the region to be designated as eligible for federal assistance.

Learn more about taxes on livestock sales

The most recent IRS Notice (Notice 2019-54) lists all 15 Arizona Counties, as well as parts of 31 other states, plus Guam, the U.S. Virgin Islands and the Commonwealths of Puerto Rico and the Northern Mariana Islands. This means that not only are any current dispositions of livestock that are made due to the drought conditions in those areas eligible for a four-year deferral, but any prior dispositions where the four-year period would have expired in 2019 are extended for at least another year. Considering that all 15 Arizona counties were listed in IRS Notice 2015-69 issued in 2015, any drought-related deferrals that were deferred in 2015 have at least another year of deferral.

Hopefully, the drought conditions subside in 2020 and we can discuss how farmers and ranchers are planning on increasing their herds next year!

If you still have any questions about deferring gains, or about your taxes in general, please don’t hesitate to contact a Henry+Horne tax professional to assist you. For more information on how Henry+Horne can help you with your tax needs, check out our Accounting Services page.


Daniel Mace, CPA