Mistakes made By Beef Cattle and Dairy Farmers
Gains or losses on the sale of breeding stock or dairy animals are not reported on Schedule F, Profit or Loss from Farming. These are reported as capital gains and losses.
Why is this important? Farm income is reported on Schedule F. Schedule F income is subject to both federal and state income taxes as well as federal self-employment ( FICA and Medicare) taxes. If the farm is operated as a sole proprietorship or partnership, which most are, the SE tax is 15.3% per cent of net farm income (7.65 per cent employee's portion plus 7.65 percent employer's portion). If the farmer reports gains on sale of breeders on Schedule F, he or she will pay self-employment tax on income not subject to self-employment tax. Additionally, gains on sale of breeders and capital gain not ordinary income.
Most cash method farmer-most are- raise their breeding and dairy stock. As cash method taxpayers, they currently expense rather than capitalize and depreciate the cost of feed, vet bills, etc. In the year these expenses are incurred. These raised animals have no depreciable basis. Breeders purchased basis is the amount the farmer paid for the stock.
When a raised breeder two or more years old is sold, the total selling price is capital gains taxed at -0-%, 15% or 20% depending on the taxpayers tax bracket. Capital gains are not subject to the 15.3% self-employment tax.
Purchased breeders' cost is depreciated upon sale, the depreciation taken over the year of ownership is re-captured as ordinary income (not subject to self-employment tax) to the extent of the gain on the sale. The excess above re-captured depreciation is taxed as capital gain.
All of the gains from sales of raised breeders is capital gains.