Drought is a major problem in the United States with detrimental impact in all sorts of ways. Not the least of which has been its impact on farmers. Farmers have an economic and business model unique from most other businesses resulting in special IRS rules in the taxation of their income to help keep them viable. Providing tax relief in times of drought is one of those components.
In September of each year, the IRS publishes a list of counties, districts, cities, parishes and municipalities for which exceptional, extreme or severe drought was reported during the preceding 12 months. Farmers can use this list to determine if they may be eligible for tax relief related to the forced sale of their livestock because of drought. As of October, 2016, the list included all or part of 37 states and Puerto Rico.
If the drought caused you to sell more livestock than usual, you generally must replace the livestock within a four-year period to postpone the tax. The IRS recently added one more year to the replacement period for eligible farmers and ranchers. This extension immediately impacts drought sales that occurred during 2012. The IRS can extend that period if the drought continues. This applies to livestock you held for draft, dairy or breeding purposes only. Sales of livestock raised for slaughter or held for sporting purposes and poultry are not eligible. You can get more information on these relief provisions in Notice 2016-60 on IRS.gov.
By Dale F. Jensen, CPA