Drought-stricken ranchers & farmers get livestock forced-sale tax relief

These West Texas cattle don't appear worried about much. Their owners, however, have a lot of concerns, including severe weather that could hurt their ranches' profitability. If drought has caused problems, the IRS is offering them some tax relief. (Photo by Kay Bell)

When we city folks think of disaster preparation and animals, we're worrying about how to keep our pets safe during and after a major Mother Nature event.

It's a bit more complicated when the animals are part of your livelihood. That's why farmers and ranchers in the path of potential disasters, like the flooding that now's across much of southeast Texas thanks to slow-moving tropical system Beta, have to make special arrangements for livestock.

Weathering wet weather: When hurricanes approach, it's not unusual to see modern day makeshift cattle drives, like this one in the Houston area before Hurricane Laura landed last month.

Too dry, too: But the Lone Star State is big. That means that while some ranchers and farmers are dealing this late summer with the sogginess of tropical storms and 'canes, out in West Texas where I grew up, many livestock owners are dealing with the adverse effects of drought.

As the map below from the National Drought Mitigation Center shows, much of the western half of the country is too darn dry. Even the island state of Hawaii is experiencing unwanted aridness.

And just like it does when folks sustain damages from seriously wet weather, the Internal Revenue Service provides assistance to those dealing with drought's ill effects.

Drought livestock sale tax relief: That happened today, with the IRS announcing that farmers and ranchers who were forced to sell livestock due to drought may have an additional year to replace the livestock and defer tax on any gains from the forced sales.

Such forced sales tend to occur when the excessively dry weather reduces feed crops. Faced with no economically viable way to feed their livestock, ranchers and farmers sell their animals before they planned.

And that means the sale proceeds must be reported and capital gains taxes paid on them before the livestock owners were ready.

The IRS' granting of an additional year to replace the livestock and defer tax on the unplanned sales gives affected agribusiness owners some financial breathing room.

Qualifying drought regions: To qualify for relief, the farm or ranch must be in an applicable region. That's a county or other jurisdiction designated as eligible for federal assistance plus counties contiguous to it.

Today's IRS Notice 2020-74 lists applicable regions in 46 states, listed in the table below, as well as in the District of Columbia and the four U.S. territories of Guam, the Northern Mariana Islands, Puerto Rico and the United States Virgin Islands.

Tax year shifts: Not to get into the cow pasture weeds, but the IRS decision means qualified farmers and ranchers whose drought-sale replacement period was scheduled to expire at the end of this tax year — that's Dec. 31, 2020, in most cases — now have until the end of their next tax year.

Because the normal drought-sale replacement period is four years, this extension immediately impacts drought sales that occurred during 2016.

The replacement periods for some drought sales before 2016 are also affected due to previous drought-related extensions affecting some of these localities.

Not just drought: And there's also some good news for farmers and ranchers who had to sell livestock prematurely but aren't in drought areas.

The notice applies the same relief to forced livestock sales also due to flooding or other severe weather that led to the region being designated as eligible for federal assistance.

More information on reporting drought sales and other farm-related tax issues can be found in IRS Publication 225, Farmer's Tax Guide.

You also might find these items of interest:

• File major disaster claims on Form 4684
• IRS and other government resources can help you deal with a natural disaster
• Storm Warnings: A guide to preparing for and recovering from natural disasters

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