Several of my farm clients have called me and asked whether receiving a crop insurance payment this year is taxable in 2009 or 2010. I commonly tell them the answer is yes. It may be taxable in 2009 or 2010 depending on what type of crop insurance it is and other matters.
In general, if you receive any crop insurance, the proceeds are taxable in the year that you receive them. However, you can postpone reporting the proceeds to the following year if you meet all of the following conditions:
a. You use the cash method of accounting for your farm.
b. You receive the crop insurance proceeds in the same year the crops are damaged.
c. You can show that under normal business practice you would have included income from the damaged crops in any tax year for the year the damaged occurred.
In brief, if you are a cash basis farmer and you usually sell all or most of your crops in the year after harvest, you should be able to defer the crop insurance proceeds into the next year. However, if your history is to sell the crops at harvest time or by the end of the year of harvest, then you will not be able to defer the proceeds.
In order to defer the proceeds, you must actually incur destruction of or damage to the crops. Agreements with insurance companies that provide for payments based upon a minimum revenue per acre without regards to actual crop losses do not qualify for the deferral.
Some farmers received payments under the Crop Revenue Coverage (CRC) purchased from federal Crop Insurance Corporation. These payments are based upon price as well as quantity and quality of the crop. Only the payment for destruction or damage (yield loss) is eligible for deferral. A farmer receiving these payments would need to calculate the portion related to the crop damage and this would be eligible for deferral. The remaining part of the payment would need to be reported in the year of receipt.
The University of Minnesota has a very good article regarding how to calculate this and other matters related to the taxation of crop insurance proceeds. Their article is located here.