Can you defer your crop insurance check?

By TONY NYE

nye.1@osu.edu

The year has been of the wacky kind when we think back to what the grow­ing sea­son was and the now the results of the har­vest sea­son. Many areas of Ohio and other Mid­west­ern states were hit hard by the 2012 drought. How­ever, yields for south­west­ern Ohio as a whole I think were bet­ter than expected but there were reports of yields as low as 7 bushels to the acre for corn and 20 bushels to the acre for beans.

The reduced yields will put some pro­duc­ers in a posi­tion finan­cially that will cause them to rely on insur­ance and dis­as­ter pay­ments to make ends meet. Due to the sever­ity of this year’s drought, many farm­ers will be receiv­ing a siz­able insur­ance check which might put them in a unique tax bind.

David Mar­ri­son, Asso­ciate Pro­fes­sor for Ohio State Uni­ver­sity Exten­sion recently pro­vided some good food for thought in a recent Ohio Ag Man­ager newslet­ter in regards to whether or not you as a pro­ducer could defer the 2012 crop insur­ance check.

Gen­er­ally, farm­ers who use the cash account­ing method must report income in the year in which they receive it. In 2012, this could cre­ate a bunch­ing of income for farm­ers who would nor­mally sell a por­tion of or their entire crop in the year fol­low­ing har­vest. If they receive an insur­ance or dis­as­ter pay­ment for their 2012 crop before the end of the year, this could lead to siz­able tax­able income because they already have reportable receipts from sell­ing their 2011 crop in 2012.

So what can farm­ers do? Mar­ri­son notes that thank­fully, the Inter­nal Rev­enue Ser­vice under­stands how farm­ers sell crops and allows for the post­pone­ment (for one year) of report­ing com­pen­satory pay­ments received for crop loss under IRC sec­tion 451(d) and Trea­sury Reg­u­la­tion sec­tion 1.451–6. Gen­er­ally, this excep­tion applies when crops can­not be planted or are dam­aged or destroyed by a nat­ural dis­as­ter such as a drought or flood. To qual­ify for the excep­tion, a farmer must use the cash method for account­ing and must show that it is his or her nor­mal busi­ness prac­tice for crop income to be reported in the year fol­low­ing the year it was grown (i.e. sold in the fol­low­ing year).

The elec­tion must cover all eli­gi­ble crops from a sin­gle farm­ing busi­ness, accord­ing to Mar­ri­son. If a farmer has more than one farm­ing busi­ness, he or she must make a sep­a­rate elec­tion for each farm­ing busi­ness. The excep­tion does not allow the tax­payer to post­pone or accel­er­ate report­ing a crop loss pay­ment if the pay­ment is received the year after the year of the crop loss. So if the farmer receives his insur­ance pay­ment in 2013 for the 2012 affected crops, it can­not be deferred.

To choose to post­pone report­ing crop insur­ance pro­ceeds received in the cur­rent year, Mar­ri­son sug­gests that farm­ers should report the amount received on line 8a of the Sched­ule F. How­ever this amount is not included as a tax­able amount on line 8b. Check the box on line 8c and attach a state­ment to your tax return. It must include the taxpayer’s name and address and con­tain the fol­low­ing information:

A state­ment that you are mak­ing a choice under IRC sec­tion 451(d) and Trea­sury Reg­u­la­tion sec­tion 1.451–6. The spe­cific crop or crops destroyed or dam­aged. A state­ment that under your nor­mal busi­ness prac­tice you would have included income from the destroyed or dam­aged crops in gross income for a tax year fol­low­ing the year the crops were destroyed or dam­aged. The cause of the destruc­tion or dam­age and the date or dates it occurred. The total pay­ments you received from insur­ance car­ri­ers, item­ized for each spe­cific crop and the date you received each pay­ment. The name of each insur­ance car­rier from whom you received pay­ments Mar­ri­son warns there may be pos­si­ble snags to all of this. Some farm­ers receive com­pen­sa­tion under rev­enue pro­tec­tion poli­cies pur­chased from a crop insur­ance agency. These pay­ments are based on the price, the quan­tity, and the qual­ity of the com­mod­ity pro­duced. Only the pay­ment for destruc­tion or dam­age is eli­gi­ble for the defer­ral. There­fore, a farmer who receives com­pen­sa­tion from a rev­enue pro­tec­tion pol­icy must deter­mine the por­tion of the pay­ment that is due to crop destruc­tion or dam­age, rather than due to a reduced mar­ket price.

Some farm­ers may also receive pay­ments under group risk pro­tec­tion (GRP) and group risk income pro­tec­tion (GRIP) insur­ance. These poli­cies pay an insured pro­ducer if the county aver­age yield or aver­age rev­enue falls below the spec­i­fied level of cov­er­age (typ­i­cally 70–95%). Because infor­ma­tion on aver­age county yields and the aver­age rev­enues nec­es­sary to com­pute pay­ments for corn and soy­beans are gen­er­ally not avail­able until the year fol­low­ing the year of loss, these insur­ance pay­ments are not eli­gi­ble for defer­ral. As with pro­ceeds from an rev­enue pro­tec­tion poli­cies, pro­ceeds from a GRP, GRIP, or other risk man­age­ment pol­icy qual­ify for the I.R.C. § 451(d) elec­tion to post­pone the income to the fol­low­ing year only to the extent the pro­ceeds are paid for dam­age or destruc­tion of a crop. Because there is no direct rela­tion­ship between an indi­vid­ual producer’s yield and insur­ance pay­ments under GRP and GRIP, insur­ance pay­ments from those poli­cies are not eli­gi­ble for deferral.

Mar­ri­son highly rec­om­mends that because of some of the poten­tial ambi­gu­i­ties in the I.R.C. § 451(d) elec­tion, it is sug­gested that farm­ers meet with their tax accoun­tant to see if this elec­tion is in the best inter­est for their oper­a­tion. Tax prac­ti­tion­ers will learn more about this sub­ject at the OSU Income Tax Schools which will be held across Ohio this fall. More infor­ma­tion about these schools can be found at http://incometaxschools.osu.edu.

Sources: 2012 Land Grant Uni­ver­sity Tax Edu­ca­tion Foun­da­tion Inc. Tax Work Book Inter­nal Rev­enue Ser­vice. Find arti­cle at www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Crop-Insurance-and-Crop-Disaster-Payments-Agriculture-Tax-Tips.

(Tony Nye is Agri­cul­ture and Nat­ural Resources Edu­ca­tor for the OSU Exten­sion, Clin­ton County.)

Posted by Tina Murdock on Dec 26 2012. You can follow any responses to this entry through the RSS Feed. Both comments and pings are currently closed.