As I have stated in other articles, weather here in Ohio can be quite fickle. While certain areas flourish, other areas can have poor production or be deemed disaster areas. Those not so lucky may have received crop insurance proceeds in 2015. If you did receive crop insurance proceeds, before you file your return, you might want to consider the following:
Deferral of certain crop insurance and disaster income proceeds
Typically, most farmers are cash basis taxpayers and proceeds from the destruction or damage of crops is included in income in the year of receipt; however, federal law allows certain insurance proceeds to be deferred one year, if certain requirement are met.
Under a special provision, a farmer may elect to include crop insurance and disaster in income in the taxable year after the year of the crop loss if it’s the farmer’s practice to report income from the sale of the crop in a later year. When the claim is related to crop loss, then the claim can be deferred if:
- The farmer uses cash method of accounting,
- The claim is received in the year of loss (if received in the next year, you cannot defer),
- The loss is from damage/destruction to crops or the inability to plant crops (and includes federal payments received for flood, drought, or any other natural disaster), and
- The farmer’s normal business practice is to sell more than 50% of the crop in the year following the harvest. (The possible crop insurance deferral is the aggregate of all crops, even if one crop such as soybeans is normally sold at harvest, and corn is usually sold the following year).
The fourth rule is the one that trips up most farmers. If this is the case, you will want to work with your crop insurance company and make sure the claim is paid after the end of the year (assuming from a tax planning perspective the maneuver makes sense).
Here’s the beauty of the tax laws provision: the election to defer crop insurance as disaster income may also be made via an amended return. For example, if a farmer reported crop insurance income in the year of receipt for 2015, and met all the above criteria for deferral, and finds later that a lower tax rate applies in 2016, the 2015 return can be amended to defer the crop insurance income to 2016. Farmers will want to keep this in mind as a year-end planning tool and do lookback if significant insurance proceeds have been received in recent years.
Revenue based types of crop insurance proceeds
If a farmer receives crop insurance proceeds that are not directly associated with an actual loss from destruction or damage of crops, but are instead paid based on low yields and/or low prices, the farmer will not be eligible to defer the income.
Sometimes a farmer sets an insurance contract to guarantee a certain level of revenue from the crop, and any shortfall is reimbursed regardless of the event causing the loss. This type of insurance is known as Crop Revenue Coverage, and in addition to covering losses caused by weather related destruction or casualty events, the insurance covers revenue losses caused by low price or low yield. Many times, insurance claims cover both damage or destruction and a revenue guarantee. Often these payments to the farmers are reported together on a year-end Form 1099. The farmer will need to determine how much of the payment was based on the crop loss (which is deferrable) and how much was based on low prices (which is not deferrable).
As always, feel free to reach out to me if you have any questions about this topic. Next month, I will share more on deferral considerations, but as they apply to livestock.
Brian E. Ravencraft, CPA, CGMA is a Principal with Holbrook & Manter, CPAs. Brian has been with Holbrook & Manter since 1995, primarily focusing on the areas of Tax Consulting and Management Advisory Services within several firm service areas, focusing on agri-business and closely held businesses and their owners. Holbrook & Manter is a professional services firm founded in 1919 and we are unique in that we offer the resources of a large firm without compromising the focused and responsive personal attention that each client deserves. You can reach Brian through www.HolbrookManter.com