Herd Basis

An election to treat a production herd as a capital asset. The election is irrevocable and must be made within two years from the end of the first year of assessment or company accounting period for which the tax liability will be affected by the purchase of the herd.
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Herd Basis

Definition

Herd basis is an accounting term applied primarily in agricultural businesses, where an election is made to treat a production herd (i.e., animals used for production rather than resale) as a capital asset rather than as inventory. This means that the herd is subject to capital allowances rather than being expensed upfront.

The election to adopt the herd basis is irrevocable and must be made within two years from the end of the initial accounting period affected by this decision. Once made, it applies to all subsequent tax periods and cannot be reversed.

Examples

  1. Dairy Farming Operation: A dairy farm that opts for the herd basis will treat its dairy cows as a capital asset. As the cows are used for milk production and not resale, this allows the farm to claim capital write-offs over time instead of expensing the cost of cows immediately.

  2. Cattle Ranch: A cattle ranch that uses cattle for breeding purposes may elect for the herd basis. By doing so, they can treat the breeding herd as a capital investment, spreading the tax benefits over several years rather than taking a lump sum deduction upfront.

Frequently Asked Questions

Q1: Can the herd basis be applied to any type of livestock?

  • No, the herd basis is specifically for production herds, which are animals used for ongoing production activities rather than for immediate resale.

Q2: Is the decision to elect the herd basis reversible?

  • No, once the herd basis election is made, it is irrevocable.

Q3: What is the benefit of electing the herd basis for tax purposes?

  • Spreading the cost over multiple years via capital allowances provides tax advantages by allowing businesses to manage their taxable income more effectively and potentially reduce taxable income over several years.

Q4: What happens if I miss the two-year deadline for making the election?

  • If the two-year deadline is missed, the business cannot retroactively elect the herd basis and must continue to treat the herd under existing tax rules.
  • Production Herd: Animals kept for continuous production purposes such as milk, wool, or offspring.
  • Capital Asset: Long-term assets that a company uses in its operations to produce goods or services.
  • Biological Assets: Living plants or animals that are subject to agricultural activities.
  • Capital Allowances: Deductions allowed for the wear and tear of certain assets over time for tax purposes.

Online References

Suggested Books for Further Studies

  • Agricultural Finance: From Crops to Land, Water, and Infrastructure by Charles B. Moss
  • Farm Accounting and Business Analysis: A Practical Guide by Peter Barry
  • Agricultural Accounting: A Guide for Farmers and Business Managers by N. Thomas G. Abell

Accounting Basics: “Herd Basis” Fundamentals Quiz

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