3.4.3. Cattle Breeding Programs
In contrast to cattle feeding, a cattle breeding program extends over a period of several years and allows the conversion of ordinary income to capital gains. Investors in a cattle breeding program purchase and maintain a herd of cows for breeding. The female calves bred in the herd (heifers) are retained, and after two years become additional breeders. Bull calves are sold off, providing some income during the breeding cycle. The cycle of a breeding herd is about five to seven years. At the end of the cycle, the entire herd is sold.
A significant difference between a cattle feeding program and a cattle breeding program is its holding period. When cattle are held longer than a two-year period, their cost is depreciated over a five-year period, using either straight-line depreciation or accelerated at 150%. Farm property cannot be depreciated at 200%. The sale of the cattle is subject to capital gains treatment. The cost of the purchased cattle is capitalized and amortized. The calves cannot be depreciated, because they were not purchased and have no cost basis.
When the program terminates, capital gains and ordinary income are