Following a disastrous wet planting season, resulting in thousands of unplanted acres, crop insurance loss checks should be arriving in the mailbox any day now. Congratulations to those farmers fortunate enough to get their seed in the ground. Hopefully, the growing season rains provided the moisture to result in a great harvest.
For those producers receiving a crop insurance loss check, take the time to assess your overall income strategy to determine if you should postpone reporting crop insurance and disaster payments until next year. Normally, cash basis producers would report crop insurance proceeds and crop disaster payments in the year received. If you’re one of the many producers who carry over prior year production into the following year, this could have a disastrous effect on your tax situation, particularly if the result includes two years of revenue in a year short on expenses due to the inability to plant and harvest a crop.
The election to postpone reporting some or all crop insurance proceeds and crop disaster payments until the following year is available if you meet these three conditions:
1. Use the cash method of accounting
2. Receive crop insurance proceeds in the same tax year the crops are damaged
3. Can show under normal business practice you would have included income from the damaged crops in any tax year following the year the damage occurred
To postpone reporting some or all of your crop insurance proceeds, you will need to provide the following:
- a statement with your tax return indicating you are making an election under IRC section 451(d) and Regulations section 1.451-6
- identification of the specific crop loss
- a statement under normal business practice you would have included income from some or all of the lost crops in the year following the loss
- the cause of the loss and the date of occurrence
- the name of the insurance carrier
- total payments itemized for each specific crop
- the date you received each payment.
As stated earlier, the overall rationale is to allow a producer the ability to consistently report when he or she normally sells his or her harvest. Based on this overall premise, deferral is not permitted for proceeds received from revenue insurance policies.
Producers who report on multiple entities or farm operations need to make a separate election for each reporting entity or operation. For a single trade or business, one election covers all of the crops represented within that trade or business.
Once made, this election requires approval from the Internal Revenue Service to change; therefore, the election might be made with the original or an amended return if it’s later determined to be in the best interest of the taxpayer.
For other tax planning strategies, we are still playing a wait-and-see game with the Section 179 expensing election and the bonus depreciation options for 2015. Remember in 2014, the tax bill wasn’t finalized until Dec. 18, which secured the equipment write-off retroactively through 2014. Apparently, Congress thinks two weeks is a sufficient amount of time for you to decide and actually make those necessary equipment purchases before the calendar year comes to an end.
My recommendation has always been and still remains that significant capital purchases should be based on sound need assessments and not solely on income tax considerations. Most farm equipment manufacturers are reporting significantly decreased sales for 2015, so if Congress takes note, this might not be the most opportune time to reduce the Section 179 expensing provision.
This column is not a substitute for tax advice.