Will crop insurance be a significant portion of your taxable income for 2012? First of all, that depends on if you carry crop insurance, and have an insurable loss because of the drought. Secondly, your crop insurance indemnity check may be taxed as part of your 2012 income, or it could be deferred to 2013 income, or portions of the check may be taxed in both 2012 and 2013. Why this is so complicated, is a function of the revenue crop insurance policies that pay on both yield reduction and price. Geeesh.
Many farmers who have crop insurance policies signed up for Revenue Protection (RP), which provides an indemnity payment based on calculations of both yield loss and revenue which is guaranteed from harvest prices. If yields drop, as they have this year, RP will make an indemnity payment. If the harvest price is better than the spring guarantee of $5.68 for corn or $13.49 for soybeans, then RP will make an indemnity payment. This can cause a problem for cash basis taxpayers who defer income to the year following production.
Iowa State University agricultural law specialist Roger McEowen is alerting farmers about the issue, given the high potential for many to receive indemnity payments from crop insurance due to drought losses. Since many famers will defer income to the following year, and have done so for many years, typical crop insurance losses due to reduced yields are allowed to be deferred as well. However, any insurance that pays for revenue losses cannot be deferred under rules of the Internal Revenue Service.
And since Revenue Protection policies cover both yield loss and financial loss, there is a problem, says McEowen. He says, “The IRS position is that agreements with insurance companies providing for payments without regard to actual losses of the insured do not constitute insurance payments for the destruction of or damage to crops. Thus, payments made under types of crop insurance that are not directly associated with an insured’s actual loss, but are instead tied to low yields and/or low prices, may not qualify for deferral depending upon the type of insurance involved.”
No, you are not filing your tax return now, and will not have to act on the issue today. However, this is something that you need to keep in mind while the drought and crop insurance claims are at the top of your mind.
McEowen says if you have Yield Protection or any other policy that is based on production loss and does not mention revenue, any received payment this calendar year can be deferred to the next calendar year if at least 50% of your income from commodity sales is typically deferred to the following year after it is earned. Any revenue policy, such as the old CRC, or Revenue Assurance, or the county income-based GRIP policies could not be deferred. You may have had that discussion with your tax preparer in prior years. However, with the new COMBO policies, and particularly the popularity of the RP policy, the issue will be a significant concern when you meet with your tax preparer before the end of the year for tax planning purposes.