November 12, 2002

LINCOLN, Neb. — Farmers and ranchers who received insurance or disaster payments or who were forced to sell livestock due to this year's drought have options for income tax planning this fall, a University of Nebraska farm business associate said.

Farmers are allowed to postpone reporting insurance and disaster payments on crop losses by one year under the U.S. Internal Revenue Service tax code Section 451(d), said Tina Barrett, interim director of the Nebraska Farm Business Association at the University of Nebraska-Lincoln. Likewise, producers who had to sell their livestock due to lack of pasture or water can postpone reporting that income for as long as two years.

The drought wiped out many dryland crops and forced growers to irrigate more than normal, which sent irrigation costs skyrocketing, Barrett said. With these factors reducing incomes, it may be beneficial for farmers and ranchers to defer paying taxes on a portion of their income.

"The major thing most farmers and ranchers will be dealing with this year is the income they received from having to sell their livestock," she said. "To qualify, the producer's county must be declared as a disaster area, which won't be a problem this year because the entire state was declared."

There are two tax options farmers and ranchers can apply to weather-related livestock sales, Barrett said.

One is to defer the income to the next year and not recognize the gain until then. This allows the taxpayer to postpone reporting the income for one year if the taxpayer's principal business is farming or ranching, the taxpayer uses the cash method of accounting and shows that the livestock would normally have been sold in a subsequent year, she said.

"The other allows the farmer or rancher not to report the income, but the proceeds must be used to purchase replacement breeding livestock within two years," Barrett said.

This second option only applies to livestock other than poultry held for any length of time for draft, breeding or dairy. The new livestock must be used for the same purposes as the livestock that was sold. For example, dairy cows must be replaced with dairy cows, she said.

Also, the taxpayer must show that the weather caused the sale of more livestock than would have been sold without the weather-related conditions. For example, if the farmer normally sells one-fifth of the herd each year, only the sales in excess of one-fifth will qualify for the provision, Barrett said.

Crop insurance payments also can be deferred on crop losses by one year, Barrett said. Generally this rule applies when crops can't be planted or are damaged or destroyed by a natural disaster, such as a drought or flood. Farmers must be able to show that, under normal business practice, the crop would have been sold in the following year. Also, losses due to revenue coverage may not be deferred.

Every farm and ranch operation is different and has varied needs at tax time, Barrett said. For more information on how to make these tax elections and for the best advice, farmers and ranchers need to see their tax practitioner or contact the Nebraska Farm Business Association at (402)472-1399.

The Nebraska Farm Business Association is part of Cooperative Extension in NU's Institute of Agriculture and Natural Resources.

11/12/02-SA

Tina Barrett
Nebraska Farm Business Association
Director
(402) 464-6324

Sandi Alswager Karstens
IANR News and Photography
(402) 472-3030

Department: Agricultural Economics