Sales of Farm Products

When you sell livestock, produce, grains, or other products you raised for sale or bought for resale on your farm, the entire amount you receive is ordinary income. This includes money and the fair market value of any property or services you receive.

Table 4-1

Where to report. Table 4-1 shows where to report the sale of farm products on your tax return.

Schedule F. When you sell farm products bought for resale, your profit or loss is the difference between your basis in the item and any money plus the fair market value of any property you receive for it. Your basis is usually your cost. See chapter 7 for information on the basis of assets. You generally report these amounts on Schedule F for the year you receive payment.

Example. In 1999, you bought 20 feeder calves for $6,000. You sold them in 2000 for $11,000. You report the $6,000 basis, the $11,000 sales price, and the resulting $5,000 profit in Part 1 of your 2000 Schedule F.

Form 4797. Sales of livestock held for draft, breeding, dairy, or sporting purposes may result in ordinary or capital gains or losses, depending on the circumstances. In either case, you should always report these sales on Form 4797 instead of Schedule F. See Livestock under Ordinary or Capital Gain or Loss in chapter 10. Animals you do not hold primarily for sale are considered business assets of your farm.

Sale by agent. If your agent sells your farm products, you must include the net proceeds from the sale in gross income for the year the agent receives payment. This applies even if you arrange for the agent to pay you in a later year. For a discussion on the constructive receipt of income, see Cash Method under Accounting Methods in chapter 3.

Sales Caused by Weather-Related Conditions

If you sell more livestock, including poultry, than you normally would in a year because of a drought, flood, or other weather-related condition, you may be able to choose to postpone reporting the gain from selling the additional animals until the next year. You must meet all the following conditions to qualify.

• Your principal trade or business is farming.
• You use the cash method of accounting.
• You can show that, under your usual business practices, you would not have sold the animals this year except for the weather-related condition.
• The weather-related condition caused an area to be designated as eligible for assistance by the federal government.

Sales made before the area became eligible for federal assistance qualify if the weather-related condition that caused the sale also caused the area to be designated as eligible for federal assistance. The designation can be made by the President, the Department of Agriculture (or any of its agencies), or by other federal agencies.

A weather-related sale of livestock (other than poultry) held for draft, breeding, or dairy purposes is an involuntary conversion. If you plan to replace the livestock, see Other Involuntary Conversions in chapter 13 for more information.

Usual business practice. You must determine the number of animals you would have sold had you followed your usual business practice in the absence of the weather-related condition. Do this by considering all the facts and circumstances, but do not take into account your sales in any earlier year for which you chose to postpone the gain. If you have not yet established a usual business practice, rely on the usual business practices of similarly situated farmers in your general region.

Connection with affected area. The livestock does not have to be raised or sold in an area affected by a weather-related condition for the postponement to apply. However, the sale must occur solely because of a weather-related condition that affected the water, grazing, or other requirements of the livestock.

Classes of livestock. You must make the choice separately for each generic class of animals--for example, hogs, sheep, and cattle. You must also figure separately the amount to be postponed for each class of animals. Do not make a separate choice solely because of an animal's age, sex, or breed.

Amount to be postponed. Follow these steps to figure the amount to be postponed for each class of animals.

1. Divide the total income realized from the sale of all livestock in the class during the tax year by the total number of such livestock sold. For this purpose, do not treat any postponed gain from the previous year as income received from the sale of livestock.
2. Multiply the result in (1) by the excess number of such livestock sold solely because of weather-related conditions.

Example. You are a calendar year taxpayer and you normally sell 100 head of beef cattle a year. As a result of drought, you sold 135 head during 2000. You realized $35,100 from the sale. On August 9, 2000, as a result of drought, the affected area was declared a disaster area eligible for federal assistance. The income you can choose to postpone until 2001 is $9,100 [($35,100 x 135) x 35].

How to make the choice. To make the choice to postpone gain, attach a statement to your tax return for the year of the sale. The statement must include your name and address and give the following information for each class of livestock for which you choose to postpone gain.

• A statement that you are making a choice under section 451(e) of the Internal Revenue Code.
• Evidence of the weather-related conditions that forced the early sale or exchange of the livestock and the date, if known, on which an area was designated as eligible for assistance by the federal government because of weather-related conditions.
• A statement explaining the relationship of the area affected by the weather-related condition to your early sale or exchange of the livestock.
• The number of animals sold in each of the 3 preceding years.
• The number of animals you would have sold in the tax year had you followed your normal business practice.
• The total number of animals sold and the number sold because of weather-related conditions during the tax year.
• A computation, as described earlier, of the income to be postponed for each class of livestock.

You must file the statement and the return by the due date of the return, including extensions. If you timely filed your return for the year without making the choice, you can still make the choice by filing an amended return within six months of the due date of the return (excluding extensions). Attach the statement to the amended return and write "FILED PURSUANT TO SECTION 301.9100-2" at the top of the statement. File the amended return at the same address you filed the original return. Once you have made the choice, you can change it only with the approval of the IRS.

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