Most farmers assume they can defer crop insurance proceeds to the following year. However, there are several rules that must be followed and the IRS has some ‘unofficial” guidance that we disagree with.
- The farmer must be on the cash method of accounting (almost all are).
- The farmer’s history is to sell at least 50% of their crops in the year after harvest (generally easy to meet),
- Crop insurance proceeds must be related to damage suffered by the crop.
- Last, you cannot defer any proceeds related to price and if you receive the proceeds in the year after damage, you can’t defer any further.
The key requirement for being able to defer proceeds is that there is “damage” suffered by the crop. For example, if a fire destroys the crop, there is specific damage. If hail destroys the crop, the same.
However, what happens if the farmer simply ends up with a “crappy” crop. Is that damage? The IRS in their Publication 225 - Farmers Tax Guide - indicates that revenue protection (RP) policies can not be deferred even if there is “damage”. We disagree. As long as their is specific damage that caused the proceeds, you should be able to defer the proceeds to the following year.
The 2012 drought created a lot of damage to crops in the corn belt. The portion of those RP related to damage (which most crop insurance companies provide) should be eligible for deferral.
However, be warned that the IRS may disagree with your position.
