With the unpredictable weather patterns the country has been experiencing, along with commodity prices lower than what is ideal, many farmers may be looking at receiving some form of crop insurance payments. Some farmers are choosing to defer their crop insurance proceeds to the next year. Here are some basic facts on how you may be able to legally report your crop insurance in the future, even though the check was received in the current year.
The logic behind deferring crop insurance payments
The basic logic behind deferring your crop insurance proceeds is that the payment received is for a crop that is normally sold in the year after harvest. With that in mind, the first rule in deferring crop insurance is that it is a normal business practice of yours to market the crop affected the year after it is harvested. You may qualify to defer your crop insurance if historically over 50% of the crop is sold the year after harvest. This calculation is on a crop by crop basis. If you consistently sell all your soybeans out of the field, for example, the IRS would typically not allow you to defer any crop insurance you receive for beans, as it is your normal practice to sell all your beans in the year they are harvested.
Yield loss, not price loss, is required for deferment
The general rule in deferring crop insurance is that the insurance must be due to crop damage or inability to plant, not lower prices. So, any insurance received that was based on the loss of revenue is not eligible for deferral and must be reported in the year the insurance check is received. This can make things difficult, as many insurance policies sold today are a combination of insurance against damage and insurance against price loss. When you receive an insurance check, you will need to prove how much of that check was calculated based on yield loss. The amount of the yield loss can be deferred. The amount received based on the market price of the crop being below the base price insured CANNOT be deferred.
Calculating how much can be deferred
Calculating how much of the proceeds are eligible to be deferred is a multi-step process that is best described by the example below:
Bob obtained crop insurance for his corn. Under the terms of his policy, the approved yield was set at 175 bushels and the base price was calculated to be $3.75. Bob paid for 75% insurance coverage level . His corn yielded 100 bushels per acre due to stalk rot after heavy rains in the fall, while the price per bushel was $3.25. Bob’s final revenue guarantee under this policy is $492.19 (175 bushels x 3.75 per bushel = 656.25 x 75%). Bob’s calculated revenue is $325.00 (100 bushel yield x 3.25 per bushel price). Bob’s insurance proceeds would be $104.19 (the guarantee of $492.19 less the actual of $325.00). However, the amount he can defer is only the amount received due to yield loss. That amount is calculated by figuring what percent of the crop insurance payment is due to physical loss compared to what is price loss. So, Bob’s total loss is $331.25 (the $656.25 calculated in the revenue guarantee less the actual revenue achieved of $325). The loss due to yield is $243.75 (175 bushels guaranteed less 100 bushels achieved x harvest price of 3.25). The loss due to price is $87.50 (175 bushels x 50 cent price drop from 3.75 to 3.25). If you divide $243.75 by $331.25 (the yield loss as compared to the total loss) you get 73.59%. This is the percent of the loss that is due to yield instead of price. That means the amount of crop insurance you can defer is $76.68 an acre (insurance proceeds of $104.19 x 73.59%).
Your crop insurance agent should be able to help you in this calculation. Your tax preparer will want to review the numbers or calculate this on their own to ensure that you have the correct numbers on your tax return.
Check with tax consultant before you defer
As you can see, deferring crop insurance is not as straightforward as it would appear. Deferring the proceeds may not always be in your best interest, especially now that there are new ways of insuring your crop. It can be part of many other considerations in your long-term income tax strategy. It is best to consult with your tax preparer to determine if it fits into your financial goals.
Disclaimer – Descriptions provided in this article are presented as generalities. There are many factors not listed above which may impact your tax return. This article should not be considered legal or tax advice. For advice on a specific transaction, please contact the AgriSolutions Tax department at firstname.lastname@example.org .