The Farm CPA
Paul is now part of the fourth generation in America that is involved in farming and hopes the next generation will be involved also. Through his blog he provides analysis and insight to farmer tax questions.
Crop Insurance Deferral Options
Nov 06, 2013
It appears that at least $5 billion of crop insurance claims have been processed this year and with the approximate $1.20 drop in corn prices from the spring, it is likely that additional corn claims will be made. Unlike last year when almost all claims related to yield losses, this year, most of the claims will most likely be related to price. This will result in different tax options. We had a reader ask the following question:
"Do I understand that part of a FCI indemnity payment can be deferred to next years income? If so, which part, that due to yield loss or that due to price?"
When a crop insurance claim relates directly to a drop in price, those claims cannot be deferred to the next year. When a claim results due to a yield loss, then the claim may be deferred if:
- The farmer uses the cash method of accounting,
- The claim is received in the year of loss (if you receive the year after, you cannot defer), and
- The normal business practice of the farmer is to sell more than 50% of the crop in the year following harvest
Almost all farmers use the cash method of accounting, so it is the third rule that trips up most farmers. I was discussing this issue with a client of mine a couple of days ago and I asked whether he sells most of his crop in the year after harvest. Since their year-end is February 28, in most years, usually less than 50% is sold in the year after harvest, so therefore, he could not defer his proceeds. One option to defer is to work with the crop insurance company and make sure the claim is paid after year-end. In his case, that is tougher with the later year-end.
This year will also result in many cases where there is both a yield loss and a price claim. In those cases, you will need to allocate the proceeds between the two claims. You may defer the yield claim (assuming you qualify otherwise), but not the price claim. Here is a good memo from the University of Illinois and Roger McEowen from last year on how to do these allocations. Your crop insurance agent can usually break down these two components for you also.