Will crop insurance be a significant portion of your taxable income for 2012? First of all, that depends on if you carry crop insurance, and have an insurable loss because of the drought. Secondly, your crop insurance indemnity check may be taxed as part of your 2012 income, or it could be deferred to 2013 income, or portions of the check may be taxed in both 2012 and 2013. Why this is so complicated, is a function of the revenue crop insurance policies that pay on both yield reduction and price. Geeesh.
Many farmers who have crop insurance policies signed up for Revenue Protection (RP), which provides an indemnity payment based on calculations of both yield loss and revenue which is guaranteed from harvest prices. If yields drop, as they have this year, RP will make an indemnity payment. If the harvest price is better than the spring guarantee of $5.68 for corn or $13.49 for soybeans, then RP will make an indemnity payment. This can cause a problem for cash basis taxpayers who defer income to the year following production.
Iowa State University agricultural law specialist Roger McEowen is alerting farmers about the issue, given the high potential for many to receive indemnity payments from crop insurance due to drought losses. Since many famers will defer income to the following year, and have done so for many years, typical crop insurance losses due to reduced yields are allowed to be deferred as well. However, any insurance that pays for revenue losses cannot be deferred under rules of the Internal Revenue Service.
And since Revenue Protection policies cover both yield loss and financial loss, there is a problem, says McEowen. He says, “The IRS position is that agreements with insurance companies providing for payments without regard to actual losses of the insured do not constitute insurance payments for the destruction of or damage to crops. Thus, payments made under types of crop insurance that are not directly associated with an insured’s actual loss, but are instead tied to low yields and/or low prices, may not qualify for deferral depending upon the type of insurance involved.”
No, you are not filing your tax return now, and will not have to act on the issue today. However, this is something that you need to keep in mind while the drought and crop insurance claims are at the top of your mind.
McEowen says if you have Yield Protection or any other policy that is based on production loss and does not mention revenue, any received payment this calendar year can be deferred to the next calendar year if at least 50% of your income from commodity sales is typically deferred to the following year after it is earned. Any revenue policy, such as the old CRC, or Revenue Assurance, or the county income-based GRIP policies could not be deferred. You may have had that discussion with your tax preparer in prior years. However, with the new COMBO policies, and particularly the popularity of the RP policy, the issue will be a significant concern when you meet with your tax preparer before the end of the year for tax planning purposes.
Your indemnity payment from crop insurance this year could be substantial, but not all of it is based on yield reduction—which can be deferred—nor on revenue reduction—which has yet to be determined and which cannot be deferred until 2013. It will be up to the farmer (taxpayer) to determine how much of the indemnity check can be deferred and how much cannot be deferred. That calculation is possible, and McEowen works through an example in his fact sheet. However, you will have to plug in your own numbers, including the $5.68 and $13.49 guarantees.
If enough crop insurance policy holders call their insurance company and ask for it, the indemnity check payment could be automatically broken down into how much was due to the yield reduction and how much was due from the revenue guarantee. Farm tax specialists may also be able to develop a quick Internet-based calculator that tax preparers and taxpayers can use. (Hint, hint.)
There is a distinct potential for crop insurance indemnity payments this fall to be based both on yield loss and on policies that pay the harvest price, if it is above the guarantee of $5.68 for corn and $13.49 for soybeans. Since policies pay for both yield and revenue, farmers with those policies will have to separate the production loss from the revenue loss, if they wish to defer a crop insurance payment to 2013, as part of their normal course of business.
Source: FarmGate Blog