Farmer's Cattle Sale due to drought

[thomtax]

Besides the ability to delay reporting profit when selling complete inventory of cattle due to drought situation, are there any other things to look at for relief benefits?

Thanks in advance.

LT

[Jiggers]

Livestock Drought Sales

There are 2 issues you need to consider:

1. Calves, heifers, steers. You postpone the income for one year only. Your principal business is farming. 2/3 of total income. Cash method of accounting. Average the number of head sold over prior 3 years to determine amount to postpone. Show gross sales where you normally report. Take a deduction for the gain postponed as other expense. Attach schedule.

2. Breeding stock - cows, bulls. Your principal business does not have to be farming. Same method, average prior 3 years to determine amount to postpone. Report sales on 4797 to report the gain, then take deduction as separate item for the amount to postpone. Attach schedule. Replace in 4 years.

Also, charge a bunch for doing this.

[Joe Btfsplk]

There are 2 issues you need to consider:

1. Calves, heifers, steers. You postpone the income for one year only. Your principal business is farming. 2/3 of total income. Cash method of accounting. Average the number of head sold over prior 3 years to determine amount to postpone. Show gross sales where you normally report. Take a deduction for the gain postponed as other expense. Attach schedule.

2. Breeding stock - cows, bulls. Your principal business does not have to be farming. Same method, average prior 3 years to determine amount to postpone. Report sales on 4797 to report the gain, then take deduction as separate item for the amount to postpone. Attach schedule. Replace in 4 years.

Also, charge a bunch for doing this.

Would you enter the deduction for the postponed gain on a separate line on 4797 below the line where you report the sale and gain?

[thomtax]

There are 2 issues you need to consider:

1. Calves, heifers, steers. You postpone the income for one year only. Your principal business is farming. 2/3 of total income. Cash method of accounting. Average the number of head sold over prior 3 years to determine amount to postpone. Show gross sales where you normally report. Take a deduction for the gain postponed as other expense. Attach schedule.

2. Breeding stock - cows, bulls. Your principal business does not have to be farming. Same method, average prior 3 years to determine amount to postpone. Report sales on 4797 to report the gain, then take deduction as separate item for the amount to postpone. Attach schedule. Replace in 4 years.

Also, charge a bunch for doing this.

Jiggers - Thanks for this info.

LT

[cpadan]

[QUOTE=Jiggers;30172]There are 2 issues you need to consider:
Average the number of head sold over prior 3 years to determine amount to postpone.

QUOTE]

Why are you using a three year average? That is not how it is computed per Reg § 1.451-7 or explained in Pub 225.


Reg § 1.451-7. Election relating to livestock sold on account of drought.


(e) Computation.

(1) Determination of amount deferred. The amount of income which may be deferred for a classification of livestock pursuant to this section shall be determined in the following manner. The total amount of income realized from the sale or exchange of all livestock in the classification during the taxable year shall be divided by the total number of all such livestock sold. The resulting quotient shall then be multiplied by the excess number of such livestock sold on account of drought.

(2) Example. The provisions of this paragraph may be illustrated by the following example:

Example. A, a calendar year taxpayer normally sells 100 head of beef cattle a year. As the result of drought conditions existing during 1976, A sells 135 head during that year. A realizes $35,100 of income from the sale of the 135 head. On August 9, 1976, as a result of the drought, the affected area was declared a disaster area thereby eligible for Federal assistance. The amount of income which A may defer until 1977, presuming the other provisions of this section are met, is determined as follows:

$35,100 (total income
from sales of beef cattle)
__________________________________ X 35 (excess number ) = $9,100
(of beef cattle )
135 (total number of (sold, i.e., 135-100)
beef cattle sold)
(amount which A may defer until 1977)


(f) Successive elections. If a taxpayer makes an election under section 451(e) for successive years, the amount deferred from one year to the next year shall not be deemed to have been received from the sale or exchange of livestock during the later year. In addition, in determining the taxpayer's normal business practice for the later year, earlier years for which an election under section 451(e) was made shall not be considered.

(g) Time and manner of making election. The election provided for in this section must be made by the later of (1) the due date for filing the income tax return (determined with regard to any extensions of time granted the taxpayer for filing such return) for the taxable year in which the early sale of livestock occurs, or (2) (the 90th day after the date these regulations are published as a Treasury decision in the Federal Register). The election must be made separately for each taxable year to which it is to apply. It must be made by attaching a statement to the return or an amended return for such taxable year. The statement shall include the name and address of the taxpayer and shall set forth the following information for each classification of livestock for which the election is made:

(1) A declaration that the taxpayer is making an election under section 451(e);

(2) Evidence of the existence of the drought conditions which forced the early sale or exchange of the livestock and the date, if known, on which an area was designated as eligible for assistance by the Federal Government as a result of the drought conditions;

(3) A statement explaining the relationship of the drought area to the taxpayer's early sale or exchange of the livestock;

(4) The total number of animals sold in each of the three preceding years;

(5) The number of animals which would have been sold in the taxable year had the taxpayer followed its normal business practice in the absence of drought;

(6) The total number of animals sold, and the number sold on account of drought, during the taxable year; and

(7) A computation, pursuant to paragraph (e) of this section, of the amount of income to be deferred for each such classification.

(h) Revocation of election. Once an election under this section is made for a taxable year, it may be revoked only with the approval of the Commissioner.

(i) Cross reference. For provisions relating to the involuntary conversion of livestock sold on account of drought see section 1033(e) and the regulations thereunder.


--------------------------------------------------------------------------------
T.D. 7526, 12/23/77 .
--------------------------------------------------------------------------------

© Copyright 2007 RIA. All rights reserved.

[Joe Btfsplk]

Use of three year average

Page 9, publication 225 does not specify a three year average, but the calculation is based on the number you 'normally' sell. A three-year average might be a reasonable way to come up with the 'normal' number.

You are also required to include, in the attachment, the number sold in each of the 3 preceding years.

You might use a mean, a median or mode to define average. The normal amount might be different than any of these if you had some reason the three year average might not represent a normal amount. Maybe a 10-year average would be better.

In the case I'm dealing with, the three year average would be zero for the prior three years since the company was formed in December 2005.

[Jiggers]

Drought Sales

IRS instructions mention reporting the number of animals sold in each of the 3 preceeding years.

You have to determine what are your normal sales and the easiest way would be to use an average of the 3 preceeding years.

If you have any other method to determine your normal sales, then use that.

The form that I use calculates an average of the 3 preceeding years to determine the normal number of head that would normally be sold. I have used this for many years and have not had any complaints or questions from the IRS.

If in 1998 you sold 4, in 1999 25, in 2000 1, in 2001 25, in 2002 15.

Using the 3 preceeding years for the calculation:
If you sold 10 head in 2003, 20 head in 2004, and 3 head in 2005, your average is 11 head per year. If you sold 50 head in 2006, do you use 3, 10, 20, 4, 25, 1, 15 or 11 in determining your gain to postpone? What is your usual number of head sold?