Check your options about reporting or deferring income from crop insurance
Roger McEowen, director of the Center for Agricultural Law and Taxation at Iowa State reminded farmers that crop insurance payments will bring tax implications for farming operations.
“For a cash-basis taxpayer, proceeds from insurance, such as from hail or fire coverage on growing crops, are includible in gross income in the year that they are actually or constructively received. In essence, destruction or damage to crops and receipt of insurance proceeds are treated as a ‘sale’ of the crop,” he explained.
However, growers may elect to defer the income into the next taxable year’s returns if the grower typically reports income from the sale of crops in the later year. “Also the deferral provision applies to federal payments received for drought, flood or ‘any other natural disaster,’” reported McEowen.
More complicated is reporting tax for newer types of crop insurance because of the interpretation of how and why the products pay claims.
McEowen wades through the technicalities:
A significant issue is whether the deferral provision also applies to new types of crop insurance such as Revenue Protection, Revenue Protection with Harvest Price.
[For] Exclusion (RPHPE), Yield Protection and Group Revenue Protection to be deferrable, payment under an insurance policy must have been made as a result of damage to crops or the inability to plant crops. Other than the statutory language that makes prevented planting payments eligible for the one-year deferral, the IRS position is that agreements with insurance companies providing for payments without regard to actual losses of the insured do not constitute insurance payments for the destruction of or damage to crops. Thus, payments made under types of crop insurance that are not directly associated with an insured’s actual loss, but are instead tied to low yields and/or low prices, may not qualify for deferral depending upon the type of insurance involved. For example, payments made under policies where yield loss triggers payment will, at least in part, qualify for deferral. Other types of policies may not hinge payment on physical damage or destruction to crop.
If a crop insurance payment is based on both crop loss and price loss from a revenue-based insurance policy, only the portion intended to reimburse the farmer for crop loss is deferrable. The portion payable because of a decline in market price is not deferrable and is income in the year the payment is received.
McEowen sorts it all out with real-world examples on a PDF available from Iowa State.
These kind of complications in the tax return are worth a note to your accountant. The ability to defer income can be a valuable tool, but getting it right is the best policy with the IRS.