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LUTZ BUSINESS INSIGHTS
crop insurance income and deferral possibilities
adam jacobitz, tax & audit shareholder
Mother Nature can be fickle – some years your yield is plentiful, whereas other years crops can be damaged due to significant drought, insect infestations, floods, fire, etc. Thankfully, there are alternatives available for tax reporting purposes if you receive proceeds from crop insurance to cover your losses.
What is Crop Insurance?
In the United States, there are two main types of crop insurance:
Policies are available through the US government’s Federal Crop Insurance Program (FCIP), as well as through private insurance companies.
Crop-Hail insurance isn’t available through FCIP. These policies are offered through private insurance companies. Crop-Hail policies cover damage to crops due to, as the name implies, hailstorms. Hail is a unique weather anomaly that’s able to devastate a large portion of a crop field and leave the rest untouched. Crop-Hail policies can be purchased at any point in the season.
Multi-peril crop insurance (MPCI) is offered through the FCIP. You must purchase this type of policy before your crops are planted. MPCI policies cover many types of loss, such as:
- Excessive drought or rainfall
- Freezing temps
- Blight or other crop diseases
More recent coverage options include:
- Yield protection
- Price protection
- A combination of the two
These types of options can cover you in the event of a low-yield year or market fluctuation.
Ways to Defer Crop Insurance Proceeds
Before you elect to defer any proceeds, it’s important that you’re aware of the following:
- The accounting method you use plays a role – you must use cash accounting
- It must be your normal practice to defer your current taxability to a subsequent year
- If you elect to defer, it applies to all proceeds you receive from crop insurance, regardless of the policy
- When you file taxes for the year in which you’re reporting damages, you must include a deferral election statement along with the facts that support said deferral
- You can amend your return to include a deferral election statement – but, once you’ve elected for deferral, it is irrevocable
- If you’ve opted for coverage that protects in the event of market fluctuation, any applicable proceeds are not eligible for deferment
- If you’re eligible to defer, the gross amount of proceeds prior to offset for premiums, is the amount used to calculate deferral
If you meet these criteria, there are two options for reporting crop insurance proceeds:
- You can report the proceeds as taxable income in the same year you receive them, or
- You can take advantage of tax law that states qualified taxpayers can report insurance proceeds or other disaster proceeds in the tax year following the actual loss – if it is your normal practice to report crop sales income the year after you receive it
The second option is a bit tricky. In order to take advantage of the second option, you must be able to prove, had your loss not occurred, that you would still have reported the crop’s income in a subsequent year – and the IRS doesn’t provide a detailed method as to how to prove this. It’s best to speak with your accountant, but a good rule of thumb is that, if you normally sell more than 50% of a crop the year after you harvest, you qualify for deferral.
Benefits of Deferring Crop Insurance Proceeds
It is beneficial for your farm’s bottom line if you’re able to report an insurance payment for a failed crop the year after you actually receive it – especially if you wouldn’t have seen profit from that crop till that following year.
The main benefit of crop insurance is to provide a safety net for those years in which your crops are damaged or otherwise unsellable. Crop insurance pays you what you would have made had you had a normal year – being able to defer those proceeds allows you to recoup any current losses from this year the following year.
Farming has a certain intrinsic risk. There are so many variables that could impact your harvest. It’s nice to know that if disaster strikes, you have options. The tax provision allowing deferment of crop insurance payments is a complex one – and has many hoops to scale. By speaking with your accountant, you can gain a better understanding of this strategy and see if you meet the requirements.
ABOUT THE AUTHOR
ADAM JACOBITZ + TAX & AUDIT SHAREHOLDER
Adam Jacobitz is a Tax & Audit Shareholder at Lutz with over 14 years of tax and audit experience. He specializes in individual and business income taxation, housing industry audits, and consulting services.
AREAS OF FOCUS
AFFILIATIONS AND CREDENTIALS
- American Institute of Certified Public Accountants, Member
- Nebraska Society of Certified Public Accountants, Member
- Affordable Housing Association of Certified Public Accountants, Member
- National Association of Housing & Redevelopment Officials - NE Chapter, Member
- Certified Public Accountant
- BA in Accounting & Finance with a Minor in Economics, Doane College, Crete, NE
- Faith Lutheran Church, Treasurer
- Leadership Hastings, Past Board Member and Treasurer
- Hastings Symphony Orchestra, Past Board Member and Treasurer
- Hastings Community Foundation, Board Member
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