Based on this year's drought, we know that this will most likely be the largest amount of crop insurance claims ever processed. With proper planning, you may be able to structure when to report these crop insurance proceeds to achieve the best tax advantage for this year.
Crop insurance proceeds due to crop damage (not price drops) are taxable in the year of receipt. However, the tax laws do allow a farmer to make a deferral until the next year assuming that the farmer meets the following:
- The crop insurance proceeds are for the current year crop, i.e. crop insurance proceeds for 2012 crop damage received in 2012 can be deferred to 2013. If the proceeds are received in 2013, then no deferral is available, AND
- The farmer normally has a history of reporting more than 50% of their crop sales in the subsequent year. For example, if the farmer harvests 50,000 bushels in 2010 and sells all 50,000 by the end of the 2010, then he cannot defer his crop insurance. If, however, he normally would sell 25,001 or more bushels in 2011, then he can defer his crop insurance proceeds.
The election to defer is made on the tax return.
If you are a farmer that normally sells all of his crop in the year of harvest, you still may be able to "defer" by working with your crop insurance agent and company to not make the claim until late in the year and receive your check after year-end, otherwise you will need to report in 2012.