LO.6 Silver Creek Ranch, LLC, is a small, family-owned cattle ranch that began operations in the current year. The ranch will grow hay that will be fed to its purebred cattle.

It will take approximately three years to build up the herd and to begin producing a positive cash flow. The owners’ other income will equal their deductions, so they will not be able to utilize farm losses for the first three years. The owners have asked you to discuss the tax accounting issues related to their cattle business.