Crop Insurances Proceeds – Update
An alert reader let me know that one of my points on how to defer your crop insurance proceeds was not written as well as it could have been.
In my original post, I had indicated that each crop is a “separate” business unit, then each crop is looked at separately. This separate business unit definition is really based upon how the farmer accounts for his grain operations. Almost all farmers account for their grain operation under one business unit which includes the production of corn, soybeans, wheat, cattle, etc. Under these conditions, the farmer if they elect to do so, is required to defer all crop insurance proceeds for those crops that qualify for the deferral.
Therefore, if the farmer has one business unit and crop insurance proceeds are received on both corn and beans, the eligibility test for deferring crop insurance proceeds is based on the aggregate. If together more than 50% of the crop sales are normally reported in the year after harvest, then the farmer can elect to defer all of the insurance proceeds to the following year.
If the farmer, however, has more than one business unit with multiple crops, then each business unit can review its situation and decide if it wants to defer the crop insurance proceeds. For example, a farmer may run his farm as a sole proprietor and have another farm operation with a brother in a partnership. Both his crops and the partnership crops are damaged by hail and receive crop insurance proceeds. The farmer can elect to defer his crop insurance proceeds, while the partnership can elect to not defer or vice versus.As you can see, crop insurance deferral rules can get a little bit complicated and each situation can be a little bit different. Always review this with your tax advisor and thanks to the alert reader for requesting clarification.
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.
What if the farmer is accrual based? We had this same situation occur in 2011. For tax purposes, the insurance proceeds were recorded in the 2011 tax year. However, for our reviewed financial statements on the accrual basis, the reviewers want to prorate a portion of the proceeds to 2012 based on the % of crops sold in each year. This is a change from how we have historically handled crop losses. I am not in favor of doing so without a sound reason for doing so. Thank you!!