With most of the corn belt fighting rain and floods, the ability to get crops in the ground has been a struggle to say the least. With the calendar now in June and many acres of corn and bean fields still sitting under water, the possibility of those acres being left idle for the year is becoming more real. Many farmers are looking at applying for prevented planting payments from their crop insurance carrier. One of the many questions that come up when this is considered is what the tax consequences may be.
Crop insurance is considered taxable income reported on your schedule F. In some cases, you may be able to defer this income into the next tax year. There are three requirements that a farmer must meet in order to take advantage of this deferral:
- The farmer must use the cash method of accounting
- The farmer receives the crop insurance proceeds in the same year that the crop is damaged
- The farmer shows that, in a normal year, the crop being produced would be sold in the year after harvest
If a farmer meets those three requirements and decides that he wants to defer the insurance proceeds, then he needs to report the amount received on line 6a of Schedule F but not on line 6b. He also needs to check the box located on line 6c and include a statement with the tax return. The statement must include the following information:
- A statement that he is making an election under section 451(d) of the Internal Revenue Code and Regulations section 1.451-6
- The specific crop or crops destroyed or damaged
- A statement that, under normal business practice, he would have sold the crop produced in the year following the year of production
- What caused the crop damage and the date or dates the damage occurred
- The total payments received from the insurance company, itemized by crop
- The name of the insurance company that the payments came from
It has been established through court cases that, as long as you can demonstrate a history of more than 50% of your crop being marketed the year following the year of production, you would meet that requirement. You also must take an all or nothing approach for each crop. You cannot elect to defer only a portion of the insurance proceeds for crop damage on corn, for example. You may, however, choose to defer the insurance payment on corn, but include the insurance payment on soybeans. If you choose to defer both, you must make a separate election for each crop.
This article is a general discussion on the rules pertaining to crop insurance proceeds. Everyone should take into consideration their own circumstances and should consult with their tax preparer on what the best option would be for their operation. Here at AgriSolutions we have many capable tax preparers on staff who would be happy to discuss this with you.
Disclaimer – Descriptions provided in this article are presented as generalities. There are many factors not listed above which may impact your tax positions. 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 .