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Crop insurance tax traps
Federal tax laws allow farmers using cash accounting to defer income into another year fairly easily by delaying grain sales.
This year, a big chunk of your income may be indemnity payments from crop insurers. You might be able to defer that as well, but it's more complicated than shifting grain sales.
What you need to do
You must be able to show the IRS that you have a history of reporting more than 50% of your crop sales in the year after you grew the crop, says Roger McEowen, an agricultural law professor who is director of the Center for Agricultural Law and Taxation at Iowa State University.
Deferring the insurance income is an election that you choose, if you qualify. If you do, you'll have to claim all of it for 2013, McEowen says. You can't split the payment between 2012 and 2013.
And if you're among those getting insurance checks that were clearly not under your control until next year, then you can't roll them into 2014, either.
The 50% test may apply to each crop that incurred payments for losses.
But if you have a single-crop business unit and insurance proceeds are received on both corn and beans, the 50% test is based on aggregate sales.
Also, you can defer only the physical losses that reduced yields – not losses from a drop in revenue. If you're buying revenue protection, that can mean in some years you'll have to calculate the share of your insurance payment that comes from yield losses alone, not the part due to a drop in prices from the base price you insured. (That base is set by average new-crop futures in February.)
This year, because the harvest price that was set in October was above the base you insured last spring, for most farmers that means all of the physical crop losses will constitute your total loss, McEowen says.
Any payments from policies that don't cover actual physical losses, such as USDA's Group Risk Plan, can't be deferred, he says.
Nor can farmers defer Average Crop Revenue Election (ACRE) payments if they have signed up for that USDA program. Those payments would be received after the 2012-2013 marketing year in a year after the crop was grown.
If you elect to shift your indemnity payment into the 2013 tax year, documentation is necessary to establish that selling more than half of your crop is a normal practice. You must file a statement that you do, along with details about the causes of the physical crop losses. And you must be able to provide the needed records if audited. Discuss this with your tax adviser.
McEowen has examples of breaking out physical losses from revenue losses. Find them at www.calt.iastate.edu.