After calving and going to spring grass this year, the word “drought” was used quite often. With other states in the West liquidating cows from the herd, it sounded like it could hit the Midwest too. Different portions of the Midwest were in different severities of drought this year, and questions were raised about the tax implications to consider when liquidating cows.
Sales income from liquidating cows would be taxable, minus any depreciable value left on purchased animals. If liquidating due to drought, sales income may be postponed for up to two years. The idea here is that if you plan to use the sales proceeds to buy back assets used in the farming/ranching enterprise, including the purchase of replacement cows, it gives you time to do it. From a tax standpoint, this ends up working sort of like a like-kind exchange.
Perhaps the biggest thing to consider about selling off part or all of a cowherd, especially if you raised all of the cattle, is the marginal tax rate(s) that will apply to the income. A large flush of income could push you into some very high marginal tax brackets. It is a much better tax outcome if you can spread sales out over multiple tax years or manage it in such a way so you do not have a significant amount of income subject to the higher end of the tax rates.
Of course, people should consult with their tax adviser before committing to liquidating a significant number of cows. The best online/print resource is the Internal Revenue Service’s Publication 225. Under “The Farm Income” topic, there is a section on “Sales Caused by Weather-Related Conditions” that may be applicable.
To summarize, two big tax-related items to consider if you are thinking of liquidating part or all of a beef cow herd are: whether you plan to reinvest the cash inflow from liquidation back into the farm/ranch in the next two years and reducing exposure to high marginal tax rates that would negatively impact the financial outcome from the liquidation process. — Steve Niemeyer, Nebraska Extension educator, and Jay Parsons, farm and ranch management specialist
