Normally, crop insurance proceeds are taxable in the year of receipt. However, if a farmer meets certain requirements, an election is available to defer the proceeds for one year. The three major requirements are:
- The crop insurance proceeds relate to a damage or destruction caused by drought, flood or other major weather disaster. This means that insurance proceeds not directly related to a weather disaster, such as insurance providing revenue guarantees or price protection, cannot be deferred. If a claim includes both types of proceeds, an allocation between claims is required.
AND - The normal business practice of the farmer is that more than 50% of the crop proceeds are received in the year after harvest. This determination is based upon the past history of deferring over half of the crop sales for the crop activity that collected the insurance.
AND - The crop insurance proceeds were collected in the year of damage. If the damage occurred in 2012 but the proceeds are collected in 2013, deferral has occurred and no further election is permitted.
If you expect to have a major crop insurance claim for the 2012 crop year, it is extremely important to review this situation with your tax advisor. Normally, a farmer would defer the insurance proceeds to 2013. However, with the potential for increased tax rates in 2013, the expiration of bonus depreciation and the implementation of new taxes under the Affordable Care Act, this may be the year to pay income taxes at lower rates rather than defer income.
If you do not meet the requirements to defer crop insurance proceeds, other strategies are available to effectively defer the income for one year. Only by making a detailed income tax projection for 2012 and 2013 can the appropriate strategy be determined.
Frequently Asked Questions Regarding Crop Insurance
What should an insured farmer do once they realize they have a crop loss?
- Notify your agent within 72 hours of discovery of the damage. This notice can be made by phone, in writing or in person. Although damage from a drought does not occur immediately, it’s important to contact your agent as soon as you feel a loss may be present.
- Continue to care for the crop using “good farming practices:” and protect it from further damage, if possible.
- Get permission from the crop insurance company before destroying or putting any of the crop to an alternative use.
- The crop insurance company will assign an adjuster to appraise the crop and assess the loss. The insured farmer must maintain the crop until the appraisal is complete. If the company cannot make an accurate appraisal, or the farmer disagrees with the appraisal, the company can have the farmer leave representative sample areas.
These representative sample areas of the crop are to be maintained – including normal spraying if economically justified – until the company conducts a final inspection. If the representative sample is not maintained properly, the loss may not be covered.
Once appraised, the crop can be released by the company to be:
1) Destroyed – through tillage, shredding or chemical means; or
2) Used as silage or feed.
- More than likely, it will be late fall or winter before most claims can be processed. As adjustors work through claims, they will be paid as they are processed. Once a payment is made, a 1099 will be provided to the insured for the year the payment is made.
- The payouts for this year’s crop insurance may be the largest in history. However, the USDA’s Federal Crop Insurance Corporation (FCIC) evaluates the financial stability of the insurance companies every year to ensure they have adequate funds to meet their obligations. In addition, the government will act as a reinsurer to guarantee that all claims are paid in a timely fashion.
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