SAVE TAXES WHEN SELLING BREEDING LIVESTOCK
An easy tax break occurs when you separate the sale of breeding livestock from your
normal calf sales. As you begin to organize your farm and ranch tax records for filing
your 2010 income tax return, report your normal calf sales on schedule F, along with
your operating expenses for the farm business. However, the sale of breeding livestock
actually receives a different tax treatment and will not be recorded on schedule F. Keep
reading to get a brief general description of why it is important to keep the breeding
livestock sales separate in your farm and ranch records.
Income Tax Rates
The following table shows 2010 federal income tax brackets for a married couple, filing a
joint return. The marginal tax rates range from a low of 10%, on taxable income of less
than $16,700, to a maximum of 35% on taxable income of greater than $372,950. To
read the tax table, first determine your taxable income and locate the appropriate bracket.
Then, take the tax in column 3 plus the percentage in column 4 times the amount your
taxable income exceeds column 1. For example, suppose you had taxable income of
$55,000 which would be in tax bracket two. Your tax liability would be $1,670 (column
3) plus 15% times ($55,000 minus $16,700 = $38,300) or $1,670 + $5,745 = $7,415. As
your taxable income passes through each bracket, it is taxed at that rate. For example, if
your taxable income was $85,000, the first $16,700 is taxed at 10%, the amount from
$16,700 to $67,900 is taxed at 15%, and only the amount over $67,900 is taxed at 25%.
Professor of Agribusiness and Chair: Department of Agriculture, University of Louisiana, Monroe.
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2010 FEDERAL TAX RATES FOR MARRIED, FILING JOINTLY
1 2 3 4 5
Over But Not Over Tax is Plus Of Amount Over
$0 $16,700 --------------- 10% $0
$16,700 $67,900 $1,670.00 15% $16,700
$67,900 $137,050 $9,350.00 25% $67,900
$137,050 $208,850 $26,637.50 28% $137,050
$208,850 $372,950 $46,741.50 33% $208,850
$372,950 ------------- $100,894.50 35% $372,950
Note that your actual income could be higher than the upper limit of one of the tax
brackets and you could still end up in that bracket. For example, a family of four would
have $14,600 in personal exemptions ($3,650 per individual) and a standard deduction of
$11,400 (even if you did not itemize deductions). Total income of $140,000 minus the
$26,000 for personal exemptions and the standard deduction would place you at $114,000
which is bracket two. Contributions to a traditional individual retirement account,
itemized deductions, a deduction for one-half of your self-employment tax, and other
expenditures will allow total income to be even higher and still put your operation in the
same tax bracket. Your tax preparer or financial advisor can assist you with ways to
lower your taxable income.
If you have self-employment income such as farming or ranching and complete a
schedule F or schedule C, you may be subject to a self-employment tax. The self-
employment tax is comprised of social security and Medicare. The social security
portion is 12.4% and the Medicare portion is 2.9% for a total of 15.3%. The full 15.3%
must be paid on earnings up to $106,800. After $106,800 of earnings, the 12.4% is
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dropped; however, there is no limit on the 2.9% for Medicare. Net farm earnings from
schedule F are subject to self-employment tax after being multiplied by 92.35%. For
example, if your schedule F showed net earnings of $85,000, then you would pay self-
employment tax on $78,498. The tax would be $78,498 multiplied by 15.3% or $12,010.
Any earnings from wages, where the employer pays half of the self-employment tax,
counts toward the $106,800. Remember, the self-employment tax is in addition to the
income tax liability.
Raised Versus Purchased Breeding Livestock
When breeding livestock is sold from a herd, there is a significant difference in the tax
implications if that animal (breeding cows or herd bulls) was purchased or raised. If the
animal was purchased, then it will have been depreciated according to the IRS rules for
class life and depreciation rates. At the time of sale, all depreciation claimed since the
purchase of that animal must be recaptured as ordinary income. This means that the
depreciation recapture will be taxed at one of the six rates in the income tax table. It is
important to note that the recapture is not recorded on schedule F; therefore, is not subject
to self-employment tax.
At the time of sale, the taxable gain is calculated by taking the sale price minus the book
value (undepreciated amount) of the animal. This gain is compared to the amount of
depreciation taken since the purchase was made. If the gain is less than the amount of
depreciation, then all of the gain is reported as recapture. If the gain is greater than the
depreciation taken, then the recapture is equal to the amount of depreciation taken, and
the excess amount may be considered a capital gain.
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The sale of raised breeding livestock is a very different set of circumstances. When you
sell a cow or bull from you herd that you raised, there is no original purchase price to
depreciate. Just a little history here will help to understand the difference. In the 1980’s,
the general method to handle raised livestock was as follows. The rancher would have to
separate the expenses of raising a heifer or bull from the other expenses of the herd.
These expenses had to be kept separate until the animal was of age for production
service, and then the total cost of raising the animal was the amount to be depreciated.
The expenses of raising the animal were referred to as pre-productive period expenses.
However, the keeping of separate expenses proved to be cumbersome unless very
detailed records were kept. Cattlemen’s groups successfully lobbied for a change in the
income tax provisions. Now, the expenses of raising the breeding stock are part of the
normal expenses of the herd and when raised breeding stock is sold, they essentially have
a zero basis for determining the gain. The gain is actually the net selling price. Since
there is no depreciation to recapture, all of the gain is typically a capital gain.
Why This Difference Is Important
The 2003 legislation enacted capital gains tax rates at generally 5% or 15%. The 5% rate
would apply to tax brackets 1 & 2 or marginal income tax rates of 10% and 15%. The
15% capital gains rate would apply to the other four brackets or including tax rates of
25%, 28%, 33%, and 35%. The sale of breeding livestock, raised or purchased, may
result in a capital gain which would be taxed at these lower rates. In addition, the sale of
breeding livestock is not reported on schedule F, which means no self-employment tax.
For raised breeding livestock sold from the herd, the net selling price is typically all
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capital gains which would be taxed at 5% or 15% and no self-employment tax. In 2008-
2010, the 5% capital gains rate has been reduced to zero percent. Thus, if you sold raised
breeding stock from your herd in 2008 and your taxable income is less than $65,100,
there is likely no tax liability on the sale. Suppose your taxable income was around
$60,000 and you had no other source of wages. Your income tax rate is 15% and the
self-employment rate is 15.3% for a total of 30.3%. If you culled a raised cow from you
breeding herd with a net selling price of $800 and you included the sale on schedule F,
your total tax liability would be about $242. However, by current tax provisions, you do
not have a tax liability on this animal.
It is important to keep a good set of records on you herd and alert your tax preparer
regarding the sale of breeding livestock. It is very important to emphasize that this
discussion is very general and, in no way, should be a substitute for the advice of a good
tax professional. There are many variations and circumstances that may alter the results
in the above discussion. To take advantage of the zero percent tax rate for 2008-2010,
farmers and ranchers can utilize a variety of strategies to manage or minimize their
taxable income. The bottom line is that the taxpayer needs to consult with a tax
professional to develop and implement a sound strategy.
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