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Power Hour: Tax Questions over Crop Insurance Payments

November 16, 2012
By: Ed Clark, Top Producer Business and Issues Editor
Estate Tax
  

Ambiguity in tax law has raised questions on rolling forward 2012 crop insurance revenue into 2013, in the view of some tax specialists.

This is potentially a huge issue for some producers. Here’s why: Many already have sold the 2011 crop in 2012, so if they have to claim crop insurance payments they receive this year as 2012 income, it means two years of crop revenue in one taxable year. Don’t get overly alarmed: If your practice is to normally sell a "substantial portion" of your crop the following year, no problem.

Power Hour web"If producers are in the habit of selling more than 50% of their crops the following year, they can make an election on their returns, and roll the crop insurance income forward into 2013," says Darrell Dunteman, Bonnett & Dunteman LLC Certified Public Accountants and Consultants, Bushnell, Ill.

There’s a catch, however. That’s for the crop yield loss portion of crop insurance only. Income guarantees cannot be rolled forward, "so you have to do a calculation."

Tax law says "normally sold" of crops sold the following year (such as 2012 crops that would be sold in 2013), but IRS rules are ambiguous as to what "normal" means, says Phil Harris, University of Wisconsin farm tax law specialist. "There is a lot of ambiguity in the law," agrees Rob Holcomb, University of Minnesota tax specialist.

"The rules are tricky to navigate," admits Brad Palen, a CPA and partner with Kennedy & Coe, Salina, Kan. A 2009 court case provides some guidance, however. In this case, a producer argued that 35% of his crop sold the following year constituted a "substantial portion," but the court rejected that argument, re-establishing that 50% is the appropriate definition of substantial.

In some cases, the 50% test is specific to an individual crop as opposed to all crops together, that is crops on which you receive payments and those you don’t, Palen says. Say your wheat crop represents more than 50% of your current year combined sales for the year. But your normal practice is to defer the sale of more than 50% of your soybean crop and soybeans are the only crop on which you would receive crop insurance proceeds. In this case, you would be eligible to defer the insurance payments as income the following year on your soybeans.

For many producers in tax year 2012, it’s more complicated than this, however. Say you receive crop insurance for more than one crop, as many will. You would first need to establish that it was your normal practice to defer more than 50% of the "combined" crops that you receive crop insurance proceeds (excluding sales from crops you do not receive crop insurance proceeds on). "It becomes an all or nothing election. This means that if you defer on one crop, you must defer on all crops receiving crop insurance," Palen says.

There are other issues, too, that producers need to be aware of. For instance, if you don’t receive your crop insurance check for 2012 corn until the tax year following the year of harvest, you are not eligible to defer it another year, Palen states. So if you receive your crop insurance check January 3, 2013 for corn you harvested this fall, the crop insurance payment must be counted as 2013 income. You cannot roll it forward into 2014.

Finally, Palen says that while the crop insurance election to roll income forward is available for 2012 payments, he can see cases where farmers may not want to roll income forward. That’s because tax rates are scheduled to be considerably higher in 2013, with reduced tax credits, unless Congress changes what’s scheduled to go into effect January 1, 2013 (for details, see the December issue of Farm Journal).
 

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