Small Business Taxes & ManagementTM--Copyright 2022, A/N Group, Inc.
There are a number of differences in the rules for farmers and other business owners. Sales of livestock normally produce ordinary income on a sale, but sales of breeding stock or animals held for draft, normally result in capital gains. But sales of livestock at a gain because of weather-related conditions that are in excess of the number you would normally sell in the usual course of business can receive special treatment. You can postpone reporting the gain if you replace the livestock. The replacement period normally ends two years after the close of the first tax year in which you realize any part of your gain from the involuntary conversion. That time period is extended in the case of federally declared disasters.
Extension of Replacement Period on Account of Drought
The IRS is reminding farmers and ranchers in applicable regions forced to sell livestock because of drought conditions that they may have more time to replace their livestock and defer tax on any gains from the forced sales.
The IRS has posted Notice 2022-43 listing the applicable regions, a county or other jurisdiction, designated as eligible for federal assistance on IRS.gov. This includes 44 states, two U.S. Territories and two independent nations in a Compact of Free Association with the United States. The relief generally applies to capital gains realized by eligible farmers and ranchers on sales of livestock held for draft, dairy or breeding purposes. Sales of other livestock, such as those raised for slaughter or held for sporting purposes, or poultry, are not eligible.
The sales must be solely due to drought, causing an area to be designated as eligible for federal assistance. Livestock generally must be replaced within a four-year period, instead of the usual two-year period. The IRS is authorized to further extend this replacement period if the drought continues.
The one-year extension, announced in the notice, gives eligible farmers and ranchers until the end of their first tax year after the first drought-free year to replace the sold livestock. Details, including an example of how this provision works, can be found in Notice 2006-82.
The IRS provides this extension to eligible farmers and ranchers that qualified for the four-year replacement period, if the applicable region is listed as suffering exceptional, extreme or severe drought conditions during any week between September 1, 2021, and August 31, 2022. This determination is made by the National Drought Mitigation Center.As a result, eligible farmers and ranchers whose drought-sale replacement period was scheduled to expire on December 31, 2022, in most cases now have until the end of their next tax year to replace the sold livestock. Because the normal drought-sale replacement period is four years, this extension impacts drought sales that occurred during 2018. The replacement periods for some drought sales before 2018 are also affected due to previous drought-related extensions affecting some of these localities.
More information on reporting drought sales and other farm-related tax issues can be found in Publication 225, Farmer's Tax Guide.
Copyright 2022 by A/N Group, Inc. This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is distributed with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional service. If legal advice or other expert assistance is required, the services of a competent professional should be sought. The information is not necessarily a complete summary of all materials on the subject. Copyright is not claimed on material from U.S. Government sources.--ISSN 1089-1536
--Last Update 09/29/22