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Tax planning: Thinking ahead when selling calves early, marketing more cows

With extreme drought conditions across the west, ranchers are making some tough decisions on thinning their herds, and with those decisions comes a little extra planning not only on the ranch management end, but also for the Internal Revenue Service (IRS).

As you know, tax season is sneaking up on us quickly, kind of like Christmas!

There are purchases and sales throughout the year, capital expenditures, credits, and deductions… but getting it all together is the key.



Leah Heidler, an accountant with Rapid City, South Dakota-based Casey Peterson and Associates is also a rancher.

Heidler said there are two tax election options for ranchers who sell more cows or more calves than usual in a drought year.



She said ranchers who operate in a county that has been declared a drought or a county contiguous to one that has been declared a drought can take advantage of these concepts.

“What we use most often is a 451 election,” she said. Heidler said this option allows a rancher to defer income from cows or calves until the following year. If a cattle producer usually sells calves in the spring, but needs to sell them in the fall, this allows for the deferral of that income to the next year. In order to utilize this option, the income from the cattle needs to be more than the average of the three years prior, and the producer can choose how much to defer.

When making plans to change up your marketing plan, talk to a tax planning expert. Photo by Heather Hamilton-Maude

“This is the most popular option,” said Heidler. As an example, she explained that on the ranch she and her husband operate, they plan to sell more heifer calves than usual this fall rather than backgrounding them. “We normally sell in January or February. We don’t have the hay so we’ll probably sell at weaning time or sooner. So in that case because of how our operation has to work, we have to sell earlier. That would put two calf crops in one year. With the 451 election, we can move the income from those heifers into the 2022 tax year.”

Heidler said that if the producer is in a county that is declared a drought again next year, the 2021 income that was deferred to 2022 will have to be counted in the 2022 taxes, but the 2022 income can be deferred to 2023, if desired. She said that in order to calculate the average over the past 3 years, the number of head sold is determined on when the income was claimed on the rancher’s taxes. So, for example, if a rancher defers the income from 100 head of heifer calves sold in October of 2021, and then experiences drought again in 2022 and chooses to defer again, he or she will have to determine the average number of head sold in 2021, 2020 and 2019. The number of head for 2021 will be based on the taxes they paid IN THAT YEAR, so in that case, even though the rancher sold extra calves, they won’t necessarily sway the average since the income was deferred. In other words, if the income is deferred, the number of head sold is “deferred” as well.

The other option for ranchers selling extra cows is the 1033 election.

This option is for those who are certain they will be replacing the cows in four years or less. It allows the cattle producer to defer the gains from the extra cows or heifers sold, and offset those gains by replacing them in 4 years or less. “You only want to do this one if you know you’ll buy replacements and not raise your own. You have to offset that deferral with a cost. If you don’t end up replacing them, you have to go back and amend your tax paperwork,” she said “It’s a timing thing and you have to think ahead and plan for what will happen,” she said.

Heidler threw in some additional ideas for ranchers concerned about the tax implications of selling more cattle than usual.

“You can buy hay or even prepay for hay, or fuel or whatever you can,” she said.

“Maybe you don’t need the hay in December, but you know you’ll need it later, you can prepay for the hay, or other feeds. In a way, that is kind of like a deferral, it’s putting that expense into this year instead of putting more income into next year,” she said.

Heidler hopes ranchers are making plans to visit with their accountants this fall if they haven’t already done so.

“It’s definitely the kind of year where coming into the tax accountant to do tax planning is a good idea. One small move to help yourself might make a difference. Tax planning is going to be crucial. It could be a game changer for people to start thinking about these things,” she said.

 


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