Can You Defer Crop Insurance Proceeds?
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It appears that there may be a fair amount of crop insurance claims for this year crops (especially Pacific Northwest wheat crops). Farmers who normally sell more than 50% of their crops after the year of harvest can normally defer their crop insurance proceeds to the year after damage.
Therefore, if a qualifying farmer receives crop insurance proceeds directly related to damage (fire, hail, extreme drought, prevent plant, etc.), then the farmer may defer those proceeds into 2022 (if received in 2021). However, most of the crop insurance proceeds are some type of revenue protection policy.
Only the proceeds related to yield may be deferred. The portion related to price cannot be deferred. Most crop insurance companies usually provide a calculation of each of these portions. In our area, it is likely that all of the proceeds can be deferred since the damage is related to yield and the harvest price is likely higher than the “discovery” price.
Some farmers will be receiving WHIP+ payments this year. The Tax Code considers these types of payments as equivalent to “crop insurance”, however, the damage being reimbursed relates to period before 2021, therefore, those proceeds are not deferrable.
Please note the IRS in their Publication 225 – Farmer’s Tax Guide on page 11 lower right hand corner specifically states the following:
“Deferral isn’t permitted for proceeds received from revenue insurance policies”
We disagree with their conclusion, but wanted to make sure that you are aware of their position. This is not a formal ruling and has never been tried in Tax Court.
Also, note that this election is made on the 2021 income tax return which will be filed in 2022. This allows us time to make the decision to either keep the income in 2021 if the “Biden” tax plan increases rates in 2022 or push it into 2022 if rates remain the same.
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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