Weather has always been a favorite topic for local coffee shop discussions, especially when the area is experiencing extreme conditions. No one would argue with the fact that southern Oklahoma and northern Texas are currently experiencing some weather extremes. U.S. Secretary of Agriculture Mike Johanns has acknowledged these extremes effective July 27, 2006, all 77 counties in Oklahoma were designated as natural disaster areas. In addition, several counties in Texas have received the same designation. What does this mean to a cattle producer living in one of these counties?
The greatest concern for many cattle producers is their lack of sufficient quantities of feed and hay. One of the implications of the declaration is that grazing and haying of land enrolled in the Conservation Reserve Program (CRP) will be allowed. If CRP land is grazed or hayed, a reduction in the CRP payment of 10 percent will be applied rather than the normal 25 percent penalty.
Another program available as a result of the designation provides low interest (3.75 percent) loans to eligible farmers and ranchers. Certain guidelines must be met in order to qualify. One of the first qualifications is that a producer must have suffered at least a 30 percent loss in production. Once the 30 percent or greater loss has been established, other requirements apply, such as having sufficient farming and ranching experience, having adequate collateral to secure the loan, willingness to keep acceptable records, and having adequate repayment ability. Loans can be for a term of one to seven years. Applications must be received within eight months of the disaster declaration date. Other assistance may come later through specially enacted federal or state legislation. Documentation or records sufficient to prove production loss will likely be necessary. Records indicating cattle numbers and pesticide and fertilizer applications will also be helpful.
The tax implications of cattle sales caused by a drought are fairly straight-forward. There are two different tax treatments that apply. The first option has to do with draft, breeding or dairy animals. If a producer sells more animals than normal, he or she can elect not to recognize any gain if the proceeds are used to purchase replacement livestock within two years from the end of the tax year in which the sale takes place. The time period is extended to four years when the sale of animals in excess of normal was in a natural-disaster-designated area.
The new livestock purchased must be used for the same purpose as those sold. Only the additional animals sold in excess of normal sales can be replaced without recognition of gain. The entire sales proceeds must be reinvested in at least the same number of animals as sold for no gain to be recognized. If the sales proceeds are reinvested in exactly the same number of animals, then the new animals will have the same basis as the animals sold. If a lesser amount than the sales proceeds is invested, a portion of the gain will need to be recognized. For example, if a producer normally sells 10 cows but sold 25 this year, the gain on the 15 would not have to be recognized. If the 15 head were raised and sold for $7,500, all the $7,500 is gain. In four years or less, if another 15 head were purchased, but for $5,000, then $2,500 ($7,500 - $5,000) of gain would need to be recognized. If more than the sales proceeds is invested, then the difference is added to the old basis to establish the new basis. A producer can choose to not recognize the gain from the sale of animals in excess of the normal amount of sales by attaching a statement with the required information to their tax return.
The second option available to a producer applies to all livestock and allows for a one-year postponement of reporting the sales proceeds from livestock sold due to drought in excess of the number ordinarily sold. The animals do not have to be replaced as in the first option. Reporting of the sales proceeds is simply deferred for one year. However, several requirements must be met. First, a producer's principal business must be farming. This is generally defined as a person who receives at least two-thirds of their gross income from farming. Second, a producer must use the cash method of accounting. Third, a producer must show that the livestock would normally have been sold in the following year. Finally, the weatherrelated conditions that caused an area to be declared eligible for federal assistance must have caused the sale of livestock. Again, a document containing the necessary information must be attached to a producer's tax return indicating that an election has been made to defer the gain.
Even though none of the above mentioned programs and provisions provide producers what we really need a good rain they do offer some assistance for some people. I would encourage you to contact your local Farm Service Agency and your tax preparer to get specific information for your individual situation. Income, expense and production records will be most helpful in meeting the requirements for any of these programs.