How to defer crop insurance checks

Oct 19, 2012
by DTN

With major drought hitting most of the Corn Belt, it’s an appropriate time to refresh on the election to defer crop insurance proceeds one tax year. It seems simple, but there are a surprising number of details.

The all-or-none rule

Many producers will receive multiple payments on private crop insurance on top of record prices for the crops they did harvest. Any crop insurance deferral election must cover all proceeds received within the year of the disaster. It is not possible to defer a portion or to be selective among different payors.

Past deferral pattern

To be eligible to make the election, a cash method farmer must establish that under normal business practice, more than 50 percent of the income from the damaged crop would have been reported in the subsequent year. There is no guidance as to how this pattern of deferral is to be measured (i.e., is looking at the past five years sufficient?). Further, all crops within a single business must be subject to the same election. A Midwest corn and soybean farmer, who collects insurance on damage to corn and beans and uses a single set of books for that grain farming operation, would be required to show that over half of corn and bean income is normally deferred to the subsequent tax year.

Timing of insurance collection

The deferral election is only available for those crop insurance proceeds and disaster payments collected in the year of damage. If a check does not appear until the year after, that payment has effectively been deferred and no additional tax election can be made.

Tax return election

Your tax preparer will need to place a special written election in the tax return, identifying the cause of the damage, the payer and the amount received. Some of that information will be on the Form 1099, so be sure to capture those documents for your preparer. But also check that each 1099 matches your records in terms of the cash collected. In some cases, the Form 1099 will exceed the cash proceeds because the carrier has reduced the payout for an unpaid installment premium. When the larger 1099 amount is reported in the tax return (whether deferred or not), a corresponding deduction for the premium charge can be claimed.

Deferral to higher rates?

It’s no secret that we are in the midst of a high stakes political poker game over the direction of tax rates for 2013. And sadly, those rates may not be determined until a new Congress comes into session in early 2013. If this rate decision lingers past a March 1 farm tax return filing date, the crop insurance could be reported as 2012 income, and an amended return filed later to defer the crop insurance to 2013 if subsequent legislation retains today’s rates. Stated differently, this is one of the few tax elections that can be accomplished via an amended return. — Andy Biebl, CPA, DTN