Profiting from losses
By: Mark Battersby
It may come as quite a surprise, but many feedlot operators are actually profiting from their losses. That’s right, handled properly those inevitable losses can generate badly-needed funds for any troubled feedlot, stocker or cow-calf operation.
Losses come in many shapes and forms. There are those loses that result from natural disasters, losses caused by dishonest employees and/or customers, financial losses from bad business decisions or a poor economy. Insurance provides protection from some types of losses and our tax laws help reduce the bite of still other losses, but properly planning for or reacting to the losses of a feedlot operation can mean business survival and, in many cases, profits.
Although so-called business continuation insurance covers the expenses of a feedlot or business temporarily forced to close its doors after a natural disaster, the importance of anticipating possible losses, and developing strategies for coping, or seeking affordable insurance protection for any possible contingencies, cannot be overstated.
Losses resulting from theft are tax deductible in the year sustained. However, the tax rules say theft losses are actually “sustained” in the year when the loss is discovered. In other words, a theft loss is not deductible in the tax year in which the theft actually occurs unless that also happens to be the year in which the loss is discovered.
Far more common are those occasions when business property is taken, legally or illegally. The government may, for example, legally take property by the simple act of “condemnation.” A new law, ordinance or regulation may be passed that permits the local government to seize assets such as feedlots that are no longer permitted within their jurisdiction. The loss of any business property by actions outside the control of the feedlot operator are usually labeled as “involuntary” conversions.
Should gain result, the rules governing involuntary conversions permit the property to be replaced with property of a “like kind,” eliminating the need to report and pay taxes on that gain. Instead, the basis of the old “lost” property is transferred to the new, postponing the taxable gain to some date in the future.
To help cushion losses suffered by businesses and others, the tax laws contain a special rule for disaster losses in an area subsequently determined by the President of the United States to warrant federal assistance. For those losses, the feedlot operator has the option of:
q deducting the loss on the tax return for the year in which the loss occurred, or
q choosing to deduct the loss on the tax return for the preceding tax year.
In other words, the operator has the option of deciding whether their loss would be most beneficial used to offset the current year’s tax bill or better used to reduce the previous year’s tax bill -– generating a refund of previously paid taxes.
If the operation has too many tax deductions, and too little income, a net operating loss (NOL) usually results. Many cow-calf, stocker and feedlot operations use losses to apply as a deduction against prior income, providing a refund of previously paid taxes. Any unabsorbed loss can be carried forward and deducted from succeeding years’ income.
For today’s NOLs, the carryback period is usually two years preceding the loss year and then forward to the 20 years following the loss year. A three-year carryback period exists for So-called “eligible” losses including the portion of a NOL relating to casualty and theft losses (but not “Federally Declared Disasters”).
Unfortunately, NOL deductions are not permitted for partnerships or S corporations although S corporation shareholders and partners in partnerships may use their distributive shares of any NOL to calculate individual NOLs.
As mentioned, losses come in many shapes and forms including loses that result from natural disasters, losses caused by dishonest employees and/or customers, financial losses from bad business decisions or a poor economy. Insurance does provide some protection from some types of losses, although it is the government -– in the form of our tax laws -– that provides a financial cushion for many of the losses suffered by a feedlot, cow-calf or stocker operation.
Unfortunately, recoveries via tax law are not always smooth, often requiring professional assistance or, at the very least, an understanding of how those tax rules work. Could your feedlot profit from its losses?