I own a small farm and have livestock. I live in a taxable agricultural property. How do I take federal deductions on my livestock?

It depends:

• Livestock held for sale can be part of your inventory. 
• Livestock for draft, breeding or dairy purposes can be inventory or can be depreciated. 
• If you are breeding livestock, it is inventory.

Inventory can be entered with the cost of good sold while assets are depreciated.

Take a look at Publication 225, Farmer's Tax Guide and determine which rules apply to your livestock and how they need to be treated.