Planning for taxes needed for crop insurance payments
ST. PAUL -- With the probability of crop losses due to weather, farmers may be receiving crop insurance indemnity payments. Any crop insurance proceeds you receive need to be included as income on your tax return. You generally include that income in the year received.
Crop insurance includes the crop disaster payments received from the federal government as the result of destruction or damage to crops, or the inability to plant crops, because of drought, flood or any other natural disaster.
You can postpone reporting crop insurance proceeds as income until the year following the year the damage occurred if you:
- Use the cash method of accounting.
- Receive the crop insurance proceeds in the same year the crops are damaged.
- And, can show that under normal business practice, you would have included income from the damaged crops in any tax year following the year the damage occurred.
Generally, farmers are able to establish their practice of reporting crop income in a following taxable year by reference to their prior year's sale records.
In order for a payment to constitute insurance for the destruction of or damage to crops, the insured must suffer actual physical loss. Agreements with the insurance companies that provide for payments without regard to actual losses by the insured, such as payments in the event that county average yield is less than a specified amount, are not payments for the destruction of or damage to crops. Also, payments made for a decline in the price of the commodity (revenue loss), rather than a physical loss, do not qualify for deferral.
The revenue-based indemnity payments farmers receive are based on price as well as quantity and quality of the commodity produced. Only the payment for destruction or damage (yield loss) is eligible for deferral.
A revenue-based policy guarantees a minimum amount of revenue per acre for the insured farmer. The policy provides a formula for computing the deemed revenue the insured received from the crop that was produced. Taken into account is price of the commodity at the time of harvest, the quantity the insured farmer harvested and the quality of the commodity harvested.
For a more detailed article, including examples of how to calculate payments, see http://www.cffm.umn.edu/Publications/pubs/FarmMgtTopics/TaxPlanCropRevIn...
This is a complicated issue and varies from one producer to another. See your tax preparer for additional information specific to your situation.
C. Robert Holcomb and Gary A. Hachfeld are ag business educators with University of Minnesota Extension.