Drought and Tax Tips

George Patrick, Purdue Extension Agricultural Economics Specialist

CROP INSURANCE INDEMNITIES: SOME TAX TIPS

General Rule: Crop insurance indemnities are generally included in income of the year in which the indemnities are received. 

Major Exception: A producer may elect to defer reporting the indemnities as income when received if the producer can show that the damaged crop would normally have been sold in the year following the year of production. 

This election to defer reporting indemnities applies to all of the crops for which crop insurance indemnities and disaster payments (if any) were received. A previous 3-year average of more than 50% of the crops affected by the election being sold in the year following the year of production would probably be sufficient to document normal business practice of a producer.

Only indemnities due to physical losses of production are eligible for deferral. Given the increases in corn and soybean prices from planting to harvest in 2012, the 2012 indemnities will be due entirely to physical losses. Indemnities paid by county-basis group insurance are not be eligible for deferral became there is no direct relationship between the indemnity and an individual producer’s yield.

Indemnities cannot be reported as income before they are actually or constructively received. An indemnity received in 2013 for a 2012 crop is reported an income in 2013 regardless of when the producer normally sells the crop. This may cause problems for producers wanting to include indemnities in their income for 2012,  

Given the very large number of claims in 2012, there may be significant increase in the time needed to process a claim. The crop insurance agent may be able to indicate the likely time needed for processing. Checking information carefully in claim preparation helps avoid delays in processing. 

Expected 2012 insurance claims of over $200,000 require a 3-year audit before this year’s claim can be paid. Help your insurance agent start the audit process as soon as possible and be sure settlement sheets are available.

Be aware of possible Aflatoxin contamination in corn. Crop insurance coverage ends at harvest and does not cover losses in storage. Check and have testing donet, if necessary, before harvest.

Producers should have alternative tax management strategies ready to be implemented depending on when the insurance indemnity is paid.  

For further information see IRS Pub. 225,”The Farmer’s Tax Guide,” or contact your tax advisor.                                                                                                                                             

LIVESTOCK PRODUCERS: SOME INCOME TAX TIPS

Many livestock producers are reducing their livestock enterprises because of a lack of forages and high grain prices due to drought. Special federal income tax provisions are intended to reduce impact of distressed sales of livestock in “excess” of normal.  

1. I.R.C. § 451(e) allows postponement of the reporting of taxable gains on the sale of additional livestock.

2. I.R.C. § 1033(e) allows the avoidance of paying taxes on the gain realized from the sale of breeding, draft or dairy animals if they are replaced within a specified time period.   

Postponement of Reporting Income 

Postponement of reporting income from weather-caused sale of livestock may be available to cash basis taxpayers whose principal trade or business is farming and who are located in an area designated as eligible for federal disaster assistance. Sales in excess of a farmer’s normal business practice can be deferred until the animals normally would have been sold.

Example 1. Bill is a cow-calf producer who normally carries his calves over and sells them as yearlings. Because of the drought in 2012 and the lack of forage, Bill sells his 2012 calves in October 2012. Bill could postpone reporting the income from the 2012 calves until 2013.

Example 2. Jane normally raises and sells market hogs. Because of the drought in 2012, Jane sells 1,000 head as feeder pigs in 2012 rather than feed them to market weight and sells them in 2013 as she would do as her normal business practice. Jane could elect to defer reporting the sales proceeds until 2013.

Sale with Replacement Intended

A producer may reduce the size of the herd by selling livestock because of the lack of pasture and forages and plan to reinvest when conditions improve. Reporting the gain realized can be postponed if the livestock are replaced. Only the gain on livestock sold in excess of normal sales can be deferred. If the animals are not replaced, an amended return for the year of sale must be filed. However, producers do have some flexibility on the time and type of replacement property.

Example 3. Jack normally culls 15 of his 100 beef cows annually. Because of the drought in 2012, Jack sells 75 of his cows for a gain of $500 per cow. Jack can elect to not report the gain on 60 cows. If Jack does not reinvest at least $500 in 60 cows by the end of the reinvestment period, generally 2 years, Jack would need to file an amended return for 2012.

For further information, see IRS Pub. 225, The Farmer’s Tax Guide, or contact your tax advisor.