David Marrison, Associate Professor
Ohio and other Midwestern states were hit hard by the 2012 drought. With reported yields as low as 7 bushels to the acre for corn, many farmers will be relying on insurance and disaster payments to make ends meet. Due to the severity of this year’s drought, many farmers will be receiving a sizable insurance check with might put them in a unique tax bind.
Generally, farmers who use the cash accounting method must report income in the year in which they receive it. In 2012, this could create a bunching of income for farmers who would normally sell a portion or all of their crop in the year following harvest. If they receive an insurance or disaster payment for their 2012 crop before the end of the year, this could lead to sizable taxable income because they already have reportable receipts from selling their 2011 crop in 2012.
So what can farmers do? Thankfully, the Internal Revenue Service understands how farmers sell crops and allows for the postponement (for one year) of reporting compensatory payments received for crop loss under IRC section 451(d) and Treasury Regulation section 1.451-6. Generally, this exception applies when crops cannot be planted or are damaged or destroyed by a natural disaster such as a drought or flood. To qualify for the exception, a farmer must use the cash method for accounting and must show that it is his or her normal business practice for crop income to be reported in the year following the year it was grown (ie. sold in the following year).
The election must cover all eligible crops from a single farming business. If a farmer has more than one farming business, he or she must make a separate election for each farming business. The exception does not allow the taxpayer to postpone or accelerate reporting a crop loss payment if the payment is received the year after the year of the crop loss. So if the farmer receives his insurance payment in 2013 for the 2012 affected crops, it cannot be deferred.
To choose to postpone reporting crop insurance proceeds received in the current year, farmers should report the amount received on line 8a of the Schedule F. However this amount is not included as a taxable amount on line 8b. Check the box on line 8c and attach a statement to your tax return. It must include the taxpayer’s name and address and contain the following information:
• A statement that you are making a choice under IRC section 451(d) and Treasury Regulation section 1.451-6
• The specific crop or crops destroyed or damaged
• A statement that under your normal business practice you would have included income from the destroyed or damaged crops in gross income for a tax year following the year the crops were destroyed or damaged
• The cause of the destruction or damage and the date or dates it occurred
• The total payments you received from insurance carriers, itemized for each specific crop and the date you received each payment
• The name of each insurance carrier from whom you received payments
Some farmers receive compensation under revenue protection policies purchased from
a crop insurance agency. These payments are based on the price, the quantity, and the quality
of the commodity produced. Only the payment for destruction or damage is eligible for the deferral. Therefore, a farmer who receives compensation from a revenue protection policy must determine the portion of the payment that is due to crop destruction or damage, rather than due to a reduced market price.
Some farmers may also receive payments under group risk protection (GRP) and group risk income protection (GRIP) insurance. These policies pay an insured producer if the county average yield or average revenue falls below the specified level of coverage (typically 70-95%). Because information on average county yields and the average revenues necessary to compute payments for corn and soybeans are generally not available until the year following the year of loss, these insurance payments are not eligible for deferral. As with proceeds from an revenue protection policies, proceeds from a GRP, GRIP, or other risk management policy qualify for the I.R.C. § 451(d) election to postpone the income to the following year only to the extent the proceeds are paid for damage or destruction of a crop. Because there is no direct relationship between an individual producer’s yield and insurance payments under GRP and GRIP, insurance payments from those policies are not eligible for deferral.
Because of some of the potential ambiguities in the I.R.C. § 451(d) election, it is suggested that farmers meet with their tax accountant to see if this election is in the best interest for their operation. Tax practitioners will learn more about this subject at the OSU Income Tax Schools which will be held across Ohio this fall. More information about these schools can be found at: http://incometaxschools.osu.edu
2012 Land Grant University Tax Education Foundation Inc. Tax Work Book
Internal Revenue Service. Find article at: http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Crop-Insurance-and-Crop-Disaster-Payments—Agriculture-Tax-Tips