All of the critical Corn Belt states have been affected by drought this year, leading to a record number of crop insurance claims. Unlike 1988 when insurance policies used yield calculations to determine crop losses, the 2012 crop insurance policies likely comprise revenue and yield protection. Revenue protection sets a "spring" price and then a "harvest" price. The greater price is multiplied by the actual production history to determine the guaranteed revenue amount. The farmer elects the percentage coverage (in some cases up to 85%), and a claim will be paid
if the actual yield times the harvest price is less than the guaranteed revenue.
This year, in light of the potential for increased taxes, farmers need to be creative to make sure their crop insurance claims are handled in a tax-savvy manner. Higher-income returns face the 0.9% Medicare surtax and the 3.8% net investment income tax, not to mention a possible increase in the top tax brackets to reach 39.6%. In addition, 50% bonus depreciation expires on Dec. 31, 2012.
If insurance proceeds include both crop destruction and a revenue-based protection claim, the farmer needs to divide up the two claims. Only the portion attributable to crop destruction can be deferred—but the farmer has to report all of the proceeds in the year of receipt or defer 100% to the following year. If the insurance proceeds aren’t received until the year after the loss, the farmer cannot elect to accelerate taxation of the proceeds into the year of loss.
Pay Now, Amend Later. The crop insurance deferral election can be made on an amended tax return. We might not know if the Bush tax cuts and Medicare surtax for 2013 have been extended or repealed by the time 2012 taxes are filed. In this case, since the election is binding once made, it makes sense to not defer, but pay the tax, and wait to see if tax changes warrant an amended return to make the election to defer at that time. A refund might be granted.
Tax Return Extension. An extension of the 2012 tax return might be warranted so that the farmer has as much time as possible to weigh the benefit of the election. An estimated tax payment by Jan. 15, 2013, will allow a later extension of the tax return without penalties for underestimating. This additional time (to Oct. 15, 2013) allows farmers to evaluate the price and yield of their 2013 crop. If the farmer expects to have a bumper crop and good price protection for 2013, it might make sense to include the crop insurance proceeds in 2012 rather than defer them to 2013.
Timing a Claim. If a farmer wants to report the crop insurance proceeds in 2013, he can work with his insurance adjuster and wait until late after harvest to make the final claim, in the hope that the check is delayed until after Dec. 31, 2012. If this works, no additional deferral is available.
Many farmers will want the crop insurance proceeds to be reported this year to offset farm expenses and soak up any related bonus depreciation and potential Section 179 deductions.
Hedge Crop Insurance Bushels. Assuming a revenue protection policy, consider hedging your estimated insurance bushels to lock in historically high prices. For example, if futures are $8 now and fall to $6 at harvest, your unhedged loss is $2 per bushel times your yield loss. By hedging, you lock in the current $8 price (this strategy applies if you believe prices will fall between now and harvest).
With timely use of these revenue protection policies, 2012 might actually provide more net income in a "drought" year than a "normal" year.
Paul Neiffer is a tax accountant with CliftonLarsonAllen and author of the blog The Farm CPA. He grew up on a wheat farm in Washington and owns a corn and soybean farm in Missouri. Contact him at firstname.lastname@example.org.
- September 2012