ANGUS BEEF BULLETIN EXTRA

November 20, 2019 | Vol. 12 : No. 11

Disaster Taxes

Tax Mitigation During Disasters

Doing your taxes might actually help during a hard year.

Nobody really wants to pay taxes, but there are good and bad ways to avoid paying them. It’s like a chess match. This year has been tough for many around the country, and Wesley Tucker, field specialist in agribusiness for the University of Missouri Extension, offers some tax mitigation strategies for dealing with disaster-caused changes.

Having income in a lower tax bracket is one of those good ways, but can also come back to bite you, warns Tucker. If you wipe out your income, you may also wipe out the opportunity to contribute to your retirement. In some instances, you also have to make sure that you still qualify as a farmer, so your income from the farm must be at least 50% of your total income.

If you have weather-related sales of livestock, there are two code sections that allow for income deferral: I.R.C. 451 (g) and I.R.C. 1033 (e). The 451 (g) deferral is for excess sales due to drought, flood or weather. You can qualify if your principal trade or business is farming, you are a cash-basis taxpayer, you would not have sold the animals under usual circumstances, and your area is eligible for federal assistance.

For this section 451 (g) to apply, the livestock don’t have to be raised or sold in the weather-related disaster area. An example of this is lost grazing area due to drought. However, the taxpayer must show the sale occurred due to the weather-related conditions, Tucker says.

The 1033 (e) focuses on breeding stock. This lets taxpayers postpone the gain on livestock sold due to weather-related sales that are more than normal. You can hold off on reporting the income from the sales if you replace them within the specified time period since you would not have normally sold them.

So, if you sold 50 head instead of 20 because of a disaster, you can wait to report 30 head as income because you will replace them. You have to do the math to decide whether that’s advantageous to you or not, Tucker says.

He explains: “If we have a drought year, expenses are high. I’m having to spend a lot on feed, and generally I don’t make a lot of money in a disaster year, so my income is low. The reality is depreciation recapture is not subject to self-employment tax. In addition, if a producer is already in that lower tax bracket, then my capital gains rate may actually be 0%. More times than not, those who call me and want to defer income from weather-related sales of livestock, they often can sell those cattle and pay very little or possibly nothing in tax on them, especially if they’re in that lower-income tax bracket.

“Then, when they do replace those animals, then that entire purchase gets to go on depreciation, which saves them taxes in the coming year, but also saves them self-employment taxes, which is 15.3%. Be very careful of whether taking that deferral is going to cost you down the road.”

If you do decide to make the election for the 1033 (e), Tucker says you must attach a statement to the return with evidence of weather-related conditions, compute the amount of realized gain, list the number and kind of livestock sold, and list the number and kind that would have been sold under normal conditions.

Tucker’s enthusiasm for number-crunching exudes when he talks, but he’s quick to note that he’s not a lawyer or accountant. He suggests reaching out to a professional when doing your farm taxes, but hopes to share some ideas on tax tools.

For more information on tax strategies and information, check out this article http://bit.ly/TaxCuts1118.