The Orchards Overlook at Sylva, NC

As 2024 comes to a close, farmers in western North Carolina are still feeling the catastrophic effects of Hurricane Helene. There are several advantageous tax rules that farmers should be aware of that might be able to ease the burden created by the storm. In this article, tax rules concerning weather-related sales of livestock will be discussed. In future articles, which will be linked here once published, other tax rules for other types of farms will be provided.

The two tax rules discussed in this article are mutually exclusive (i.e., a farmer will have to pick from one or the other). While a farmer can elect to switch from Section 451(g) to Section 1033(e), the reverse (i.e., a switch from 1033(e) to 451(g)) cannot be done, at least, not without IRS permission. A litany of factors are worth considering to ensure that farmers make the optimal decision for their respective farms, and tax professionals should be absolutely be involved in that decision.

IRC Section 451(g) – Deferral of Income for 1 Year

What is it?

IRC Section 451(g) enables livestock farmers who sold more animals in one year due to weather-related conditions to defer the extra income attributable to the extra sales to the following year.

Why use it?

In short, the IRS understands that storms, such as Hurricane Helene, may have forced farmers’ hands and made them sell more livestock than normal for any of a number of reasons (e.g., unable to procure sufficient feed, loss of usable land rendering continued operations on the remaining land unsustainable, inability to recruit enough labor to help on the farm, etc.). Without 451(g), farmers who sold more livestock than normal would likely see a significant increase in revenue in the year of the storm, which in turn would make the tax burden on that year to be particularly costly. By deferring the excess income to the next year, the farmer can have more time to plan for the added tax burden, hopefully with less stress from the storm at that point.

What are the requirements for 451(g)?

• Principal business must be farming (i.e., more than 1/2 of income must be from farming)
• Must use cash accounting method
• Must show that animals would normally have been sold in following year*
• Weather condition that caused the area to be under federal disaster area caused the sale of livestock (not hard to show)

*The requirement that the animals would have been sold in the following year will be met or not met based on the farmer’s prior three years of sales. If the farmer averaged the sale of 50 head of cattle over 2021, 2022, and 2023 and then sold 80 head in 2024, the farmer will be able to defer sales from 30 head of cattle from 2024 into 2025.

It is also worth noting that the sale can take place before or after the area is declared eligible for disaster relief.

IRC Section 1033(e) – Involuntary Conversion

What is it?

IRC Section 1033(e) enables farmers to purchase replacement draft, breeding, or dairy livestock within a 2-year replacement period and postpone the gain realized from the sale of the initial livestock until the sale of the replacement livestock. While Section 1033(e) normally establishes a 2-year replacement window, the replacement period can convert to a 4-year window if the area is declared a federal disaster area (which should be the case for most, if not all of the areas damaged by Hurricane Helene).

Why use it?

Much like Section 1031 can be used to defer the gain in sale on real estate, Section 1033(e) can be used to defer the gain in sale on livestock during the year of the disaster.

What are the requirements for 1033(e)?

To elect to use Section 1033(e), attach a statement on your 2024 tax return that includes the following information:

• Name, address, and tax identification number
• Evidence of weather-related condition
• Explanation of how the sale is related to weather
• Computation of amount of gain realized (sale price of excess animals sold)
• Number and kind of livestock sold (limitation on draft, breeding, and dairy livestock)
• Number and kind of livestock that would have been sold under normal business conditions (using the same 3-year benchmark described with Section 451(g))
• Amount of gain realized on sale or exchange
• Amount of income that will be postponed

A few caveats are worth noting on Section 1033(e). First, the requirement is to purchase replacement livestock of the same type and value, not necessarily the same head count. In other words, if a farmer sold 20 head of dairy cattle for $10,000, Section 1033(e) requires the farmer to purchase $10,000 of dairy cattle – the number of head is irrelevant and, if the farmer had instead purchased beef cattle, Section 1033(e) would not apply. If a farmer were to buy less than $10,000 of dairy cattle during the replacement period, the farmer would have to amend his 2024 tax return and pay additional taxes for 2024 plus interest. If a farmer were to buy more than $10,000 of dairy cattle, the farmer would be required to take the excess amount and depreciate that on future tax returns.

Also, these replacement animals can be purchased at any time during the replacement period, including in staggered periods (e.g., $5,000 of dairy cattle in 2025 and another $5,000 in 2026).

Lastly, Section 1033(e) can be used on replacement livestock for livestock that had been on the farm for any amount of time prior to the disaster. In other words, if a dairy farmer had purchased dairy cattle a week before Hurricane Helene and decided to sell them and purchase replacement dairy cattle, Section 1033(e) could still apply.

Other Information Concerning Relief from Hurricane Helene

IRS Extensions

Taxability of Disaster Relief Payments

Updates on Unemployment Benefits

Waiver of Dyed Diesel Regulations (waiver now expired)