Many farmers will receive crop insurance proceeds (including insurance proceeds from multi-peril policies such as reimbursement for a wheat fire) in 2020. Most farmers assume they can elect to defer these proceeds to 2021. But you must follow certain rules to qualify.
Here are the key requirements:
- A farmer must be on the cash method of accounting.
- A farmer needs to normally sells more than 50% of crop in the year after harvest.
- The proceeds must be related to damage, not price.
- The proceeds must be paid in the year of damage.
The last requirement can trip up lots of farmers. Many times, the crop insurance proceeds come in right after year-end. In this case you have already deferred the proceeds at least one year after damage, therefore, you can’t defer it another year. Also, the IRS states in their Farm Tax Publication you can’t defer any proceeds from a revenue protection policy (this has never been litigated). We continue to believe that revenue protection proceeds can be deferred for payments related to damage.
The 411 on Disaster Payments
What about disaster payments from USDA? The Wildlife and Hurricane Indemnity Program Plus (WHIP+) provides disaster payments to producers for losses incurred due to hurricanes, wildfires and other qualifying natural disasters. Signup opened in September 2019. In February 2020, USDA added certain other losses as follows:
- Losses due to excessive moisture and D3 and D4 drought (signup opened March 23, 2020).
- 2018 and 2019 Sugar beet losses.
- Quality losses.
Signup ended Oct. 30, 2020.
Disaster payments including most WHIP+ payments also qualify as “crop insurance” under the tax code. However, most of the 2020 WHIP+ proceeds relate to damage that occurred in either 2018 or 2019. Those payments are not eligible for deferral even though the farmer otherwise qualifies. The only WHIP+ payments that can be deferred are payments directly related to 2020 damage.
The payment limitation is $125,000 per person or legal entity; however, this can increase to $250,000 if more than 75% of adjusted gross income (AGI) is from farming. There is an overall $500,000 limit for 2018, 2019 and 2020. Many farmers automatically assume their operation will qualify, however, if they show a loss on Schedule F and have gains on Form 4797 or outside wage income, it is highly unlikely that they will qualify for the increased payment amount. They need to show sufficient Schedule F farm income to allow the equipment gains to qualify.
Paul Neiffer is a tax principal with CLA and author of the blog, The Farm CPA.
