IRS extends relief for drought-impacted farmers and ranchers
The Internal Revenue Service (IRS) has issued a reminder for eligible farmers and ranchers who were compelled to sell their livestock due to drought conditions.
These individuals may now have an extended timeframe to replace their livestock and defer tax on any gains from these forced sales.
Announcement overview
The IRS has released Notice 2023-67 which provides a comprehensive list of areas eligible for federal assistance. This encompasses 49 states, the District of Columbia, two U.S. Territories, and two independent nations associated with the U.S. through a Compact of Free Association.
"The relief generally applies to capital gains realized by eligible farmers and ranchers on sales of livestock held for draft, dairy or breeding purposes."
However, it's important to note that sales of other livestock, such as those raised for slaughter or sporting purposes, as well as poultry, do not qualify for this relief.
Eligibility and conditions
Criteria for sales
The sales of livestock must be exclusively due to drought conditions that led to the area being designated as eligible for federal assistance.
Replacement period
Typically, livestock must be replaced within a two-year period. However, due to the severity of the drought, this period has been extended to four years. If the drought persists, the IRS holds the authority to further extend this replacement timeframe.
One-year extension
The IRS has announced a one-year extension, allowing eligible farmers and ranchers until the end of their first tax year after the first drought-free year to replace the sold livestock.
"The IRS provides this extension to eligible farmers and ranchers that qualified for the four-year replacement period, if the applicable region is listed as suffering exceptional, extreme or severe drought conditions."
This determination of drought severity is made by the National Drought Mitigation Center.
Impacted sales and replacement periods
Farmers and ranchers whose drought-sale replacement period was initially set to expire on Dec. 31, 2023, will, in most scenarios, now have until the end of their subsequent tax year to replace the sold livestock.
This extension primarily affects drought sales that took place in 2019. However, the replacement periods for some drought sales prior to 2019 are also influenced due to previous drought-related extensions affecting certain localities.