Livestock and Taxes: Inventory vs. Depreciable Breeding Stock

Short answer: How a farm animal is treated for tax depends on two things: whether you raised it or bought it, and whether you hold it for sale or keep it for draft, breeding, dairy or sport. Livestock bought for resale is reported on Schedule F when sold, and isn't depreciated. Livestock bought for draft, breeding, dairy or sport can be depreciated or included in inventory, as long as you're consistent. Livestock you raise usually has no depreciable basis, because the costs of raising it were deducted. And sales of draft, breeding, dairy or sporting animals go on Form 4797, not Schedule F, where depreciation taken on purchased animals is recaptured as ordinary income. Ask your CPA how each group in your herd is classified.

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1. Held for sale, or kept for the herd?

Publication 225 sorts farm sales by why you hold the animal. In its Table 3-1, farm products raised for sale and farm products bought for resale are reported on Schedule F. Farm assets not held primarily for sale, such as livestock held for draft, breeding, sport or dairy purposes (bought or raised), are reported on Form 4797. Publication 225 says animals you don't hold primarily for sale are considered business assets of your farm. Livestock held primarily for draft, breeding, dairy or sporting purposes is considered used in your farm business, and the purpose is ordinarily determined by your actual use of the animal. An animal isn't held for breeding or dairy merely because it's suitable for that purpose.

That one question, sale or herd, drives the rest: whether an animal can be depreciated, whether it belongs in an inventory, and where its sale is reported.

2. Livestock you buy to resell

• Reporting: Publication 225 says amounts from sales of products you bought for resale, such as livestock, are reported on Schedule F, generally for the year you receive payment.
• Profit or loss: it's the difference between your selling price and your basis in the animals, usually the cost. Publication 225's feeder-calf example reports the sales price on Schedule F, line 1a, and subtracts the basis on line 1b.
• No depreciation: the Schedule F instructions say not to deduct depreciation of livestock you bought or raised for resale, or other property in your inventory.

3. Breeding, dairy, draft and sport animals you buy

• Your choice, applied consistently: Publication 225 says you can either include in inventory or depreciate livestock purchased for draft, breeding, sport or dairy purposes. You must be consistent from year to year, and you can't change your method without IRS approval.
• Depreciation only outside inventory: livestock purchased for draft, breeding or dairy purposes can be depreciated only if it isn't kept in an inventory account.
• When depreciation starts: depreciation for livestock begins when the animal reaches the age of maturity. For immature livestock bought for draft purposes, that's when they can be worked; for breeding or dairy, when they can be bred. Your basis for depreciation is your initial cost.
• Recovery periods: Publication 225, Table 7-1, lists these livestock rows (in years):

Asset (as named in Pub 225, Table 7-1)	GDS recovery period	ADS recovery period
Cattle (dairy or breeding)	5	7
Goats and sheep (breeding)	5	5
Hogs (breeding)	3	3
Horses, breeding and working (12 years or less when placed in service)	7	10
Horses, breeding and working (more than 12 years when placed in service)	3	10

Which system and method apply depends on your facts; that's a question for your CPA.

4. Livestock you raise

• Usually no depreciable basis: Publication 225 says livestock you raise usually has no depreciable basis, because the costs of raising it are deducted and not added to its basis.
• On a sale: for cash-method farmers selling raised livestock used in the farm business (held for draft, breeding, dairy or sport), Publication 225 says the gain is generally the gross sales price reduced by any expenses of the sale, such as sales commissions and freight or hauling from the farm to the commission company. The basis of the animal is zero if the costs of raising it were deducted while it was being raised. If you're required to use the accrual method, Publication 225 points to the uniform capitalization rules instead.
• If a raised animal dies: Publication 225 says you can't deduct as a loss the value of raised livestock that die if you deducted the cost of raising them as an expense.

5. Selling breeding, dairy, draft or sport animals

• Form 4797, not Schedule F: Publication 225 and the Schedule F instructions both say sales of livestock held for draft, breeding, sport or dairy purposes are reported on Form 4797. Publication 225 says these sales may result in ordinary or capital gains or losses, depending on the circumstances.
• Purchased animals: for cash-method farmers, Publication 225 says the gain or loss on purchased livestock used in the farm business is the gross sales price minus your adjusted basis and any expenses of sale.
• Holding periods for section 1231: Publication 225 says cattle and horses must be held for draft, breeding, dairy or sporting purposes for 24 months or longer, and other livestock (including hogs, mules, sheep, goats, donkeys and other fur-bearing animals) for 12 months or longer. For section 1231 purposes, livestock doesn't include poultry.
• Depreciation recapture: Publication 225 says any part of the gain on livestock used in your farm business that is ordinary income from the recapture of depreciation isn't section 1231 gain. Under its section 1245 rules, a gain on the disposition of section 1245 property, which includes depreciated personal property such as purchased breeding stock, is treated as ordinary income to the extent of depreciation allowed or allowable, and any recognized gain above that is a section 1231 gain. So a purchased breeding animal you depreciated can produce both ordinary income and section 1231 gain when it's sold. The Form 4797 instructions send gains on cattle and horses held 24 months or more to Part III (section 1245), except raised cattle and horses sold at a gain, which go to Part I; other livestock follows the same split at 12 months.
• Before the holding period: animals held for draft, breeding, dairy or sport but sold before 24 months (cattle and horses) or 12 months (other livestock) don't get section 1231 treatment. The Form 4797 instructions report those sales in Part II, ordinary gains and losses.

6. If you keep an inventory

The Schedule F instructions say that under the accrual method, in most cases you must include animals and crops in your inventory, and they point to Publication 225 for exceptions and inventory methods. Publication 225's inventory rules for livestock:

• Livestock held primarily for sale must be included in inventory. Livestock held for draft, breeding or dairy purposes can either be depreciated or included in inventory.
• Valuation methods include cost, lower of cost or market, the farm-price method and the unit-livestock-price method.
• Under the unit-livestock-price method, you group livestock by type and age and use a standard unit price for each animal in a group. If you use it, you include all raised livestock in inventory, whether held for sale or for draft, breeding, sport or dairy purposes.
• If you value livestock inventory at cost or lower of cost or market, you don't need IRS approval to change to the unit-livestock-price method. If you use the farm-price method, you must get IRS permission to change to it.
• Your inventory record should show the actual count or measurement of the inventory and all factors that enter into its valuation, including quality and weight, if applicable.

7. Records that tie to these rules

• For each animal or group you bought: the purchase date, the cost, and whether it was bought for resale or for draft, breeding, dairy or sport.
• For animals bought young for breeding or dairy: when they could be bred (that's when depreciation starts).
• Your depreciation schedule for purchased breeding, dairy, draft or sport animals.
• Sale records, with the expenses of sale (commissions, freight or hauling).
• If you keep an inventory: the year-end count and how each class was valued.

Where DeepYield fits

DeepYield is a second set of eyes, not a replacement for your CPA. A free two-year look-back is a review of your last two years of tax returns, done for you, and for a livestock operation that includes how animal sales were split between Schedule F and Form 4797 and how purchased breeding stock was depreciated or inventoried. We go looking for what's missing, and we share what we see with you and your CPA. Sometimes the review ends with nothing to change.

Related: Year-End Tax Planning for Farmers and Ranchers

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Frequently asked questions

Can I depreciate cattle I raised myself?

Usually not. Publication 225 says livestock you raise usually has no depreciable basis, because the costs of raising them are deducted and not added to their basis. When a raised animal is sold, its basis is zero if the costs of raising it were deducted during the years it was being raised.

Can I depreciate breeding cows I bought?

You can choose. Publication 225 says you can either include in inventory or depreciate livestock purchased for draft, breeding, sport or dairy purposes, but you must be consistent from year to year, and livestock can be depreciated only if it isn't kept in an inventory account. Depreciation on animals bought for breeding or dairy begins when they can be bred, and Table 7-1 lists cattle (dairy or breeding) with their own recovery period.

Where do I report selling feeder cattle I bought?

On Schedule F. Publication 225 says amounts from sales of livestock you bought for resale are reported on Schedule F, and your profit or loss is the difference between your selling price and your basis in the animals (usually the cost). Its example reports the sales price on Schedule F, line 1a, and subtracts the basis on line 1b.

Where do I report selling breeding or dairy livestock?

Not on Schedule F. Publication 225 and the Schedule F instructions say sales of livestock held for draft, breeding, sport or dairy purposes are reported on Form 4797. Publication 225 says these sales may result in ordinary or capital gains or losses, depending on the circumstances. Depreciation you took on purchased animals is recaptured as ordinary income first.

How long do breeding animals have to be held for section 1231 treatment?

Publication 225 says cattle and horses must be held for draft, breeding, dairy or sporting purposes for 24 months or longer, and other livestock, such as hogs, sheep and goats, for 12 months or longer. For section 1231 purposes, livestock doesn't include poultry. If you depreciated a purchased animal, the part of the gain that is ordinary income from depreciation recapture isn't section 1231 gain.

Do I have to keep a livestock inventory?

It depends on your accounting method. The Schedule F instructions say that under the accrual method, in most cases you must include animals and crops in your inventory, and they point to Publication 225 for the exceptions. Your CPA can tell you which method your operation uses.

Can I switch from depreciating my breeding stock to inventorying it?

Not on your own. Publication 225 says you must be consistent from year to year, regardless of the method you have chosen, and you can't change your method without obtaining approval from the IRS.

Sources

• IRS Publication 225, Farmer's Tax Guide (2025) (chapter 2 Farm Inventory; chapter 3 Sales of Farm Products and Table 3-1; chapter 4 losses; chapter 7 depreciable livestock, Immature livestock and Table 7-1; chapter 8 Section 1231 holding periods and Livestock; chapter 9 Livestock used in farm business and Section 1245 property): https://www.irs.gov/publications/p225
• Instructions for Schedule F (Form 1040) (2025), Profit or Loss From Farming (Other Schedules and Forms You May Have To File; Accounting method; Line 14): https://www.irs.gov/instructions/i1040sf
• Instructions for Form 4797 (2025), Sales of Business Property (chart: Where to make first entry for certain items reported on this form, lines 7 and 8): https://www.irs.gov/instructions/i4797

Results depend on your specific facts. No outcome is guaranteed. This is general information, not tax advice; advice is provided only under a signed engagement.

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