2013 Income Tax Deferral of Crop Insurance Payments

2013 Income Tax Deferral of Crop Insurance Payments

You may be able to defer crop insurance payments you received from damage to crops or the inability to plant crops.

A farmer asks, "I received a fairly good size crop insurance payment in 2013 for prevented planting, as it was so wet last spring I couldn't get either corn or soybeans planted on 450 acres. Do I have to report that payment on my 2013 federal income tax? Or can I defer it to 2014? Grain prices for crops we sold in 2013 were high so we already have a high income for this year. I'd like to defer the crop insurance income we received in 2013, and report it as 2014 income, if possible."

DEFERRING INCOME: Farmers who use cash method accounting may be able to defer crop insurance and other disaster payments as income into the taxable year following the year of crop loss, if the taxpayer's normal practice is to report income from the sale of the crop in the later year.

In this week's edition of Farm Management Friday, Iowa State University Extension farm management specialist Steve Johnson addresses that question, which was sent to Wallaces Farmer magazine by a reader. With assistance from Roger McEowen, professor of agricultural law at ISU, Johnson provides the following answer to the farmer's question:

Federal tax law allows 2013 income from crop insurance and prevented planting to be deferred to 2014 -- if you qualify

For a cash basis taxpayer, proceeds from insurance, such as from hail or fire coverage on growing crops, are included 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. Under a special provision, taxpayers on the cash method of accounting may elect to include crop insurance and disaster payments in income in the taxable year following the year of the crop loss if it is the taxpayer's practice to report income from the sale of the crop in the later year.

The provision covers payments made because of damage to crops or the inability to plant crops. Also the deferral provision applies to federal payments received for drought, flood or "any other natural disaster."

Deferability and the crop insurance policy payment trigger

A significant issue is whether the deferral provision also applies to new types of crop insurance such as Revenue Protection (RP), Revenue Protection with Harvest Price Exclusion (RPHPE), Yield Protection (YP) as well as Group Risk Protection (GRP) and Group Risk Income Protection (GRIP).~~~PAGE_BREAK_HERE~~~

To be deferrable, the 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 payments without regard to actual losses of the insured, do not constitute insurance payments for the destruction of or damage to crops.

Revenue-based types of crop insurance may not qualify for deferral of payment

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. Thus, deferral eligibility is tied to whether payment was caused by crop damage or destruction resulting in yield loss or whether payment was triggered regardless of yield loss, that is, by lower prices.

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. Example: how to figure crop insurance payment deferability

Consider the following example provided by ISU's Center for Agricultural Law and Taxation. It was modified for 2013 crop insurance prices:

Al Beback took out an insurance policy (RP) on his corn crop. Under the terms of the policy the Actual Production History (APH) or approved corn yield was 170 bushels per acre, and the projected base price for corn was $5.65 per bushel. At harvest, the price of corn was $4.39 per bushel. Al's insurance coverage level was set at 75%, and his actual yield was 100 bushels per acre.~~~PAGE_BREAK_HERE~~~

Al's final revenue guarantee under the policy is 170 bushels x $5.65 x .75 = $720.38 per acre. Al's calculated revenue is his actual yield (100 bushels per acre) multiplied by the harvest price ($4.39 per bushel) which equals $439 per acre. Al's insurance proceeds is the guaranteed amount ($720.38 per acre) less the calculated revenue ($439 per acre) or $281.38 per acre.

His physical loss is the 170 bushel per acre APH yield less his actual yield of 100 bushels per acre or 70 bushels per acre. Multiplied by the harvest price of $4.39 per bushel, the result is a physical loss of $307.30 per acre. Al's price loss is computed by taking the base price of $5.65 per bushel less the harvest price of $4.39 per bushel, or $1.26 per bushel. When multiplied by the approved yield of 170 bushels per acre, the result is $214.20 per acre.

So, to summarize, Al the farmer has the following situation:

· Total loss: (1) anticipated income/acre

[170 bushels/acre APH @ $5.65/bushel =

$960.50/acre] less (2) actual result: 100 bushels/acre actual yield @ $4.39/acre = $439.00 for a result of $521.50/acre.

· Physical loss: 70 bushels/acre x $4.39/bushel harvest price = $307.30/acre

· Price loss: 170 bushels/acre x $1.26/bushel = $214.20

· Physical loss as percentage of total loss:

$307.30/$521.50 = .5893

· Insurance payment: $281.38/acre

· Insurance payment attributable to physical loss (which is deferrable): $281.38 x .5893 = $165.81/acre

· Portion of insurance payment that is not deferrable: $281.38 – $165.81 = $115.57/acre.

Source: Roger McEowen, Attorney-at-Law & Director, Center for Agricultural Law and Taxation, at Iowa State University. This article, Tax and Legal Issues Associated With The 2012 Drought, was originally written July 20, 2012 and updated August 6, 2012. Now it has been updated for 2013.

For farm management information and analysis visit Ag Decision Maker; ISU farm management specialist Steve Johnson's site is available here.

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