At the request of CCA, the California Franchise Tax Board (FTB) has taken steps to align California's Tax provisions with those of the federal government, extending the period ranchers have to replace livestock using deferred taxable gains resulting from the sale of livestock due to drought.

Under federal and state law ranchers can defer taxable gains associated with the sale of breeding stock due to drought and in turn use those funds, which should have been otherwise paid to the national and state treasuries, to repurchase breeding stock once the drought ends.

Under § 1033 (e) of the Internal Revenue Code and § 24949.1 of the California Revenue and Taxation Code ranchers typically must use taxable gains previously deferred within four years at the end of a drought to repurchase breeding stock. The Internal Revenue Service (IRS) has the authority to extend the replacement period if a drought continues, however.

An Announcement was issued by the IRS in October to extend the beginning of the four-year replacement period by another year due to continuing drought conditions. Ranchers operating in all 58 California counties are currently eligible for the extension. The recent announcement by the FTB makes it clear that California will follow the timeline set by the IRS to use deferred taxable gains to replace breeding stock.

The IRS determines the drought status of each county assessed using the U.S. Drought monitor that is published weekly by the National Drought Mitigation Center at the University of Nebraska, Lincoln. Ranchers operating in counties and those adjacent that have been declared in extreme, exceptional or severe drought at some point during the tax year are eligible to defer taxable gains. Similarly, the IRS determines a drought has ended for a county when a county has gone a year without being declared in extreme, exceptional or severe drought.

Producers can also exercise the use of § 451 (e) of the Internal Revenue Code which allows ranchers to postpone any gain associated with the sale of livestock due to drought to the next tax year. According to the FTB, § 451 (e) can also be used for your state tax return. Additional criteria must also be met to utilize either § 1033(e) or § 451(e).

If you believe these provisions may help you in reducing your tax liability at the state or federal level, CCA strongly advises you to speak directly with your tax accountant or attorney to determine your specific eligibility. Additional information and eligibility requirements for both drought provisions can be found on the National Cattlemen's Beef Asso fact sheet.