Can You Defer CFAP Income?
Farmers may be allowed to defer crop insurance income for one year when the farmer suffer damages, .
However, certain steps must be met as follows:
- The farmer is on the cash method of accounting (about 99+% of farmers use the cash method);
- The farmer typically sells at least half of their crops in the year after harvest;
- The proceeds must be related to damage not price. The IRS is on record that revenue protection policies can not be deferred (however, no cases have been litigated in Tax Court on this issue):
- You can only defer it to the year after the damage occurred, not the year you receive the funds if later.
As an example, Edward received $50,000 crop insurance proceeds related to hail on his 2020 corn crop. If he receives the funds in 2020, he may elect to defer reporting the income to 2021 (assuming he meets the other requirements). If he receives the proceeds in 2021, he cannot defer it to 2022. Farmers who use Whole Farm insurance automatically cannot defer their proceeds since it is always in the year after the crop is harvested.
The proceeds do not have to be from crop insurance. It could be proceeds related to fire damage. Certain disaster payments may qualify for deferral too.
Technically CFAP is a type of “disaster” payment. However, in almost all cases the payment is related to price not actual damage to the crop, therefore for everything but specialty crops, no deferral is allowed.
In some cases, there could be a case where proceeds related to reimbursing the grower for specialty crops left in the field MIGHT qualify. However, in most cases, these farmers will not qualify since most vegetable growers sell their crop right out of the field. Many fruit growers may sell more than 50% of their crop in the year after harvest, but CFAP damages would not apply since their crop was harvested last year and no physical damage occur, only market damages so far.
Again, this is something that we are surmising. The IRS has not ruled on this, but it is likely that all CFAP payments received in 2020 will be taxable in 2020, even payments coming later in the year.
Paul Neiffer is a certified public accountant and business advisor specializing in income taxation, accounting services, and succession planning for farmers and agribusiness processors. Paul is a principal with CliftonLarsonAllen in Walla Walla, Washington, as well as a regular speaker at national conferences and contributor at agweb.com. Raised on a farm in central Washington, he has been immersed in the ag industry his entire life, including the last 30 years professionally. Paul and his wife purchase an 180 acre ranch in 2016 and enjoy keeping it full of animals.
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