Grow Long-Term Capital Gains while Growing Your Herd

Farmers and ranchers have big decisions to make when growing their operations. One of the decisions that can have a long lasting business and cash flow impact is the way you grow your breeding herd.

There are basically two options for growing your herd: buying breeding stock or retaining your own stock. If you have other business reasons for purchasing outside stock, please don’t let this article persuade you otherwise. However, if you’re on the fence about buying vs retaining, let’s see how that can have additional benefits.

Benefits of retaining your own stock:

  • An animal retained and not sold reduces income on the Schedule F
  • If the Schedule F net income is a positive number, this also reduces self-employment tax (with no concern about Congress passing pesky depreciation updates – late in the year)
  • The feeding and preparation of the animal for the breeding herd is a currently deductible operating expense (for a cash basis farmer)
  • When the retained animal is culled from the herd, the entire sale price is a long-term capital gain and not subject to self-employment tax
  • Opportunity to hand pick the offspring of animals that you already enjoy working with due to ease of birthing, positive disposition, and quality of offspring

Another idea for a farmer looking to improve genetics while reaping the benefits of retaining their own stock is to consider an artificial insemination program for the herd.

The link to the article below has good information about the costs and benefits of artificial insemination for a cow herd. Artificial Insemination (AI) vs. Owning a bull

Yet another idea that I have come across for maximizing long-term capital gain potential in your herd is to buy the animals younger and pay for the feed out period. If you are purchasing breeding stock from a particular producer, contract to purchase the stock at the earliest age possible and pay the producer for feed and yardage if you don’t take physical possession immediately.

This post is an updated version of a post that I wrote for my firm’s blog here.

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