Manage crop insurance payments
Farmers who pay income taxes on a cash basis have been adept at shifting farm income and expenses into the tax year that’s most advantageous.
Many farmers will receive substantial crop insurance indemnity payments due to this year’s drought. Farmers will want to manage timing of those payments so they receive them in the tax year that is most advantageous.
For example, farmers who deferred a lot of 2011 crop sales into the 2012 tax year may want to defer crop insurance indemnity payments into 2013. But make sure you understand IRS regulations.
• Farmers who pay taxes on a cash basis routinely shift income among tax years.
• Drought will result in sizable crop insurance payments to many farmers.
• Understand rules so you take payments in a tax year that’s most advantageous.
“For deferability purposes, the Internal Revenue Code requires that payment under the policy must be on account of actual physical damage or destruction to the crop,” says Roger McEowen, director of the Center for Ag Law and Taxation at Iowa State University.
“Payment triggered by low price or yield doesn’t cut it. Check the crop adjuster’s statement; maybe a portion can be attributable to physical damage, but don’t hold your breath.”
Rules for deferral
The specific rules for deferral are:
• The crop insurance proceeds are for the current-year crop — that is crop insurance proceeds for 2012 crop damage received in 2012 can be deferred to 2013. If the proceeds are received in 2013, then no deferral is available.
• The farmer normally has a history of reporting more than 50% of crop sales in the subsequent year.
• The election to defer is made on the tax return.
• Payment is on account of physical damage to the crop.
“Remember, if a farmer can’t meet the Section 451 deferral rules because of the policy, the farmer may be able to ‘defer’ by working with the crop insurance agent and company to not make the claim until late in the year and receive their check after year-end,” says McEowen. “That assumes the farmer is a cash-basis taxpayer.
Heavy claim loads mean you’ll want to plan ahead with your crop insurance agent to manage payment timing.
Steve Johnson, Iowa State University Extension farm management specialist, has been discussing tax implications of crop insurance indemnity payments with representatives from Rain and Hail LLC.
Summary highlights of those discussions include:
• As the company works through these losses this fall after harvest, it will be paying the claims as they are processed. The company will not be able to defer any payments or portions of payments until the following year.
• Usually the company will make payments until a couple days before Christmas for claims that have been processed. Everything processed after that will be paid in the following year.
• The company will issue a 1099 to the insured for the year in which the payment is made.
• The company does not make deferments. It relies on the insured’s accountant or tax preparer to help them decide what to do in filing their income taxes.
Most insured will benefit with the crop price increase associated with revenue protection crop insurance policies. That’s because the revenue guarantee uses the higher of the harvest price (October average futures price for December corn and November soybean) versus the projected price (February average futures price for December corn and November soybeans).
Since the harvest price will likely exceed the projected price, the physical loss would have constituted 100% of the total loss; therefore, the entire insurance payment would have been deferrable.
Each insured should consult with their individual tax preparer to get their advice.
This article published in the August, 2012 edition of WALLACES FARMER.