Given the extreme drought conditions in the west, ranchers are making some tough decisions about thinning their herds, and with those decisions, additional planning is required not only for ranch management but also for the Internal Revenue Service (IRS).
As you know, the tax season is creeping up on us fast, a bit like Christmas!
There are year round purchases and sales, investments, credits and deductions … but putting it all together is key.
Leah Heidler, an accountant at Casey Peterson and Associates in Rapid City, South Dakota, is also a rancher.
Heidler said there are two tax options for ranchers who sell more cows or more calves than usual in a drought year.
She said ranchers working in a county that has been declared a drought or a county adjacent to one that has been declared a drought can benefit from these concepts.
“What we use the most is a 451 choice,” she said. Heidler said this option allows a rancher to postpone income from cows or calves until the following year. If a rancher normally sells calves in the spring but has to sell them in the fall, that income can be postponed until the next year. In order to be able to use this possibility, the income of the cattle must be above the average of the last three years and the producer can choose how much he wants to set aside.
If you’re planning on changing your marketing plan, speak to a tax planning expert. Photo by Heather Hamilton-Maude
“That’s the most popular option,” says Heidler. As an example, she explained that at the ranch she and her husband run, they plan to sell more heifer calves than usual this fall, rather than pushing them into the background. “We usually sell in January or February. We don’t have the hay so we’ll probably sell for weaning or sooner. In this case we have to sell earlier due to our operations. That would mean two calf harvests in one year. With option 451 we can shift the income of these heifers to tax year 2022. “
Heidler said that if the producer is in a county that is declared a drought again next year, the 2021 income deferred to 2022 must be factored into 2022 taxes, but the 2022 income can be deferred to 2023 if desired will. She said to calculate the average of the past 3 years, the number of heads sold is determined when income is claimed from rancher’s taxes. For example, if a ranchers postpones the income of 100 heifer calves sold in October 2021 and then experiences another drought in 2022 and chooses to postpone again, he or she needs to find the average number of calves sold in 2021, 2020, and 2019. The number of animals for 2021 is based on the taxes you paid THAT YEAR. In this case, even though the rancher has sold additional calves, he will not necessarily change the average because the income has been deferred. In other words, when income is deferred, the number of heads sold is also “deferred”.
The other option for ranchers selling extra cows is option 1033.
This option is for those who are certain they will be replacing the cows in four years or less. It allows the cattle farmer to defer the profits from the additional cows or heifers sold and offset those profits with replacements in 4 years or less. “You only want to do this when you know you’re buying replacements and not raising your own. You have to offset this delay against costs. If you don’t replace them, you’ll have to go back and change your tax records, ”she said. “It’s a time thing and you have to think ahead and plan what will happen,” she said.
Heidler brought in some additional ideas for ranchers who were concerned about the tax implications of selling more cattle than usual.
“You can buy hay or even hay or fuel or whatever you can prepay for,” she said.
“You may not need the hay in December, but you know you will need it later, you can pay for the hay or other feed in advance. In a way, it’s a kind of postponement, putting these expenses into this year instead of putting more income into the next year, ”she said.
Heidler hopes the ranchers plan to visit their accountants in the fall if they haven’t already.
“It’s definitely the kind of year that going to the tax advisor for tax planning is a good idea. One small movement to help yourself can make a difference. Tax planning will be crucial. It could be a turning point for people to think about these things, ”she said.