Tax expert Paul Neiffer provides insight to some common crop insurance concerns.
Q. I have heard that I can defer my crop insurance proceeds for 2012 until 2013. How does that work?
A. If a farmer receives crop insurance proceeds related to damage caused by weather events, such as this year’s drought, the crop insurance proceeds may be eligible for deferral to 2013 if the farmer’s normal business practice is to collect more than 50% of his crop proceeds in the year after harvest. If he cannot meet this test, then all crop insurance proceeds received in 2012 are reported this year.
Q. What if I do not meet the normal business practice test and want to report the proceeds in 2013?
A. The only way to not report crop insurance proceeds related to the 2012 damage is to make sure that you file the claim as late as possible in the year and collect the proceeds in 2013, not 2012.
Q. What if I have a CRC or RA policy that provides a revenue guarantee? Are any of these proceeds available for deferral?
A. If the reason that you collect insurance is related to damage caused by the drought and the price received at harvest is greater than the "planted" price, then all of the crop insurance proceeds would be available for deferral (as long as you meet the normal business practice test). However, if the price at harvest drops below the "planted" price, then part of your proceeds will be due to pure price protection and none of those proceeds will be eligible for deferral. Your tax advisor should be able to help you allocate between the two.
Q. What if my history is to sell my beans at harvest and my corn in the next year? How does that affect my deferral?
A. If you have a single trade or business (which applies to most farmers), then you must aggregate the crops on which you receive insurance and meet the normal business practice. If, in aggregate, more than 50% of your corn and beans is collected in the next year, then you can defer. The deferral is "all or nothing." If you only collect on one crop, you must meet the 50% test for that one crop.
Q. What if I collect my crop insurance proceeds in 2013 and want to report in 2012?
A. Crop insurance proceeds cannot be accelerated into a tax year prior to the year collected.
Read more from Paul Neiffer with his "The Farm CPA" blog.