ISSUES RELATED TO INCOME FROM SALE OF LIVESTOCK …
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Transcript ISSUES RELATED TO INCOME FROM SALE OF LIVESTOCK …
ISSUES RELATED TO
INCOME FROM SALE OF
LIVESTOCK DUE TO
WEATHER-RELATED
CONDITIONS
Timothy D. Bachicha, CPA
Extension Farm Management Specialist
Colorado State University Cooperative Extension
Telephone (719)852-2871 email
[email protected]
TWO SEPARATE ISSUES:
IRS Code section 451(e):
Think Sales of Market Livestock - primarily
IRS Code Section 1033(e):
Think Sale or Exchange of Capital Asset
Breeding Livestock, Draft or Dairy
Important points:
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1. Election
2. Cash Basis Farmer
3. Forced to Sell
4. Area Designated
5.Under 451 – income recognized next year
6. Contrary to usual business practices
Must Attach Statement
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Basic information about taxpayer
Evidence of weather related conditions
Specific numbers and types of animals
Normally sold (last three years)
Sold this year
Computation of income deferred
IMPORTANT
• Election must be made separately for each
broad generic classification
• Hogs, Cattle, Sheep
• Not based on age, sex or breed
Why Defer Income?
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Federal Income Tax Brackets
Time Value of Money
Self-employment Tax Issues
Social Security Limits on Earnings
2002 – $84,900
2001 - $80,400
Considerations
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Multi-year perspective
Tax not main factor in decision
Next Year?
How does it fit with other elections?
Sec. 179 ($24,000)
30% Bonus Depreciation
Income Averaging
Considerations, 2
• NOL Carrybacks/carryforwards
• Crop Insurance Proceeds – Election?
Decisions, Decisions !!!
• Process is multi-faceted
• Consider your OWN situation
• Consult your own Tax Professional
Section 1033
• Involuntary Conversion
• Think Exchange
Defer Recognition of Gain
• Mandatory if directly converted
(exchanged)
• Optional under other situations
• Insurance Proceeds
• Sales due to Weather-related Conditions
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DROUGHT
Contingent
• Replacement
• Within a certain time frame
• Replacement Property must be
• SIMILAR OR RELATED IN SERVICE
(OR IN USE)
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NOT “LIKE KIND”
CONTINGENT, 2
• Qualified Replacement property
• Cost at least as much as amount realized
• Cost less? - Recognize gain!
General Rules
• Property Involuntarily Converted
• Purchase Replacement Property
• Make a Valid Election
DEFINITION
• Compulsory or Involuntary
• Destruction – in whole or in part
• Deemed Involuntary Conversion:
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Destruction of Diseased Livestock
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Sales on Account of Drought
Drought Sales
• Solely on account of drought, flood, or
other weather related conditions
Example:
• Normally sell 50 cull cows
• Drought – Sell 75
• Involuntary Conversion – 25 head
Replacement Property
• “Similar or related in service or use”
• Not = to “Like-Kind” definition
• “…similarity in the relationship of the
services or uses which the original
replacement properties have to the taxpayerowner.”
Replacement, 2
• Substantially similar property
• Substantial Continuation of prior
commitment
• Character of Investment has not changed
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not necessarily “duplicate”
• Return as close as possible to his/her
original position
Special Rule
• Related party transactions
• Realized gain <$100,000, deferral of gain is
denied.
Examples
• Similar in Use
• Not Similar in Use
Purchase Requirement
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Purchased
Not Raised in Own Herd
Purchase Price = Cost Basis
Gift – N/A
Tax-free Exchange – N/A
Special Definition
• If replacement is not Feasible
• Soil Contamination
• Other Environmental Condition
• Then replacement can be with any other
property “used for farming purposes”
Replacement Period
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Two-years
December 31, 2004
Must be Completed
Extension Possible
Making the Election
• Include only the Gain that may not be
deferred
• Provide statement with details
• Deemed Election
What If…?
• Replacement not made or,
• All conditions not satisfied?
• Not Replaced within time frame
• Costs Less
• Decide to not replace
• Other conditions not met
AMEND!
• The Original Return for the Year of the
Involuntary Conversion
• Any intervening years that are affected
• NOL carry forward or carry back
Change Election
• Didn’t Make Election?
• File amended return before replacement
period ends
Change Election, 2
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Made Election, want to change?
Replacement property doesn’t qualify
Cost is less
Change or revoke before actual replacement
Change Election, 3
• AMENDED RETURNS
BOTTOM LINE
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Get competent professional advice
Know your operation
Know your plans
Know what is available
Not an easy decision
Colorado Tax Credit
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FYI – Income 55
Credit available to offset Colorado Tax
4.63% of amount actually deferred
Under IRC Sec 451 – not 1033
Principal trade or business is farming
Carry forward unused credits – 5 years