Weather triggers income tax options

(Reprinted with permission from the December 2007 issue of the Ohio AG Manager newsletter.)
COLUMBUS – Taxpayers selling livestock due to feed shortages caused by drought, floods or other weather-related problems have two options for postponing the income from the sales.
The first applies to draft, breeding or dairy animals that will be replaced within a two-year period. The second applies to all livestock and allows a one-year postponement of reporting the sales proceeds as taxable income.
Are you replacing? Sales in excess of the number ordinarily sold in the producer’s usual or normal business practice is treated as the involuntary conversion. Gains for breeding or dairy livestock will not need to be recognized 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 two-year replacement period is extended to four years if the weather condition that caused the excess sales also caused an area to be eligible for assistance by the federal government. It can be further extended by the secretary of treasury if the weather condition continues for more than three years.
Generally, the new livestock purchased must be used for the same purpose as those sold because of weather-related conditions. Breeding stock must be replaced with breeding stock, and dairy cows with dairy cows.
However, if the condition that caused the involuntary conversion also makes it not feasible to replace the livestock with similar livestock, then the livestock can be replaced with any property, including real property, used in the farming business.
One-year deferral. The election for a one-year deferral of income is available for any sales of livestock, sold in excess of what is normally sold, due to weather conditions.
This election is available for both breeding and market livestock.
Generally, farmers who use cash accounting must report payments in the year they receive the payments. An exception to this rule applies to crop insurance and disaster payments allowing these to be postponed by one year.
A farmer must be able to show that, under the taxpayer’s normal business practice, the income from the crop would have been reported in a year following the year of the receipt of the payment. The election covers all crops from a farm.
Crop insurance proceeds and the disaster payments must be aggregated in determining whether to defer the income reporting or to include the payments in current year income.
If a farmer has more than one farming business, a separate election must be made for each farming business. For purposes of this provision, separate businesses are defined as those for which the taxpayer keeps separate books and is allowed to use different methods of accounting. In general, that requires the businesses to be separate and distinct.
Crop insurance. Some farmers received compensation for Crop Revenue Coverage (CRC) policies they purchased from the Federal Crop Insurance Corporation. These payments are based on the price, as well as the quantity and quality, of the commodity produced.
Only the payment for destruction or damage is eligible for the deferral. Therefore, a farmer who receives compensation from a CRC policy must determine the portion of the payment that is due to crop destruction or damage rather than due to a reduced market price.