When you have farm land, owning cattle can provide you with an opportunity to turn that land into a profitable business. Owning cattle not only gives you an opportunity to turn a profit, it also entitles you to some tax benefits from the Internal Revenue Service. Taking advantage of these benefits can help increase the bottom line.
Cattle purchased for the sole purpose of raising it and reselling it is considered market livestock. According to the University of Georgia, market livestock is taxed at regular marginal tax rates. This means that when you sell the cattle, the profit on the sale is added to your normal income for the year. Then you are taxed at the appropriate marginal tax rate, depending on how much you earn for that year.
If you purchase livestock for the purpose of breeding it, then this is not taxed at normal marginal tax rates. Instead, you get the tax benefit of being able to pay taxes on these gains at capital gains tax rates. If you hold the cattle for over one year, you will be taxed at the long-term capital gains tax rate. The long-term capital gains tax rate is typically lower than what you would pay for your marginal rate.
Depending on where your farm is, you may be able to get a break on your property taxes. Some states provide agricultural designations for farmland. If your land qualifies as agricultural, this means that you get to pay less money on property taxes. If you have hundreds of acres, this could be a substantial tax break. Typically, to get the designation, you must have some livestock on the land or have some crops growing.
The process of raising cattle can be quite expensive. Because of this, the IRS allows you to deduct many of the costs that you incur during this process. For example, if you pay for feed or fertilizer for the land, you get to deduct these costs. If you pay wages for a farm hand, you also get to deduct these costs. These costs lower the amount of taxable income for your farm and lower your tax liability as well.