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Deferring Crop Insurance Proceeds

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December 28th, 2010

We had a reader ask the following question:

“Can you defer crop hail insurance proceeds to the next tax year the same as you can the CRC payments if you normally sell more than 50% of the crop in the year after it is produced? “

Based on the facts presented in the question, the answer should be yes.

Crop insurance proceeds are normally reported in the year of receipt.  However, if a farmer meets the following three conditions, they can defer the revenue to the next year:

  • The farmer uses the cash method of farming.
  • The farmer receives the crop insurance proceeds in the same tax year the crops are damaged.
  • The farmer can show that under their normal business practice, the farmer would have included income from the damaged crops in any tax year following the year the damage occurred.

We are assuming that the farmer in the question meets the first two conditions, i.e., cash method farmer and the proceeds received are for the current crop year.

The IRS has ruled that a farmer who can established a history of reporting more than 50% of their crop sales in the year after harvest would be allowed to defer any crop insurance proceeds for the current crop into 2011.

In order to make this election, the farmer should attach to their income tax return describing the facts of the crop insurance proceeds such as the following:

  • A description of the crop destroyed and when it occurred.
  • Under the normal business practice of the farmer, the income derived from the crop would normally be reported in the following tax year.
  • A description of the crop insurance proceeds as to who paid it, the amount and the timing of the receipt, etc.

Remember, if the crop was damaged in 2010 and you receive the crop insurance proceeds in 2011, you can not defer the income till 2012.

Also, if you do elect to report the income from the crop insurance proceeds in the current year, you may be able to dramatically reduce the tax by using farm income averaging.

Paul Neiffer

Paul Neiffer is a certified public accountant and business advisor specializing in income taxation, accounting services, and succession planning for farmers and agribusiness processors. Paul is a partner with CliftonLarsonAllen in Yakima, Washington, as well as a regular speaker at national conferences and contributor at agweb.com. Raised on a farm in central Washington, he has been immersed in the ag industry his entire life, including the last 30 years professionally. In fact, Paul drives combine each summer for his cousins and that is what he considers a vacation.

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