Farm Industry News
Growers could face tax bill from crop insurance payments, 2011 crop income

Growers could face tax bill from crop insurance payments, 2011 crop income

Widespread yield loss from the 2012 drought could cause a cash-flow conundrum this spring for many Midwestern farmers — even for those who obtain timely crop insurance payments, says Gary Schnitkey, Extension farm management economist, University of Illinois. As a result, he urges farmers to engage in some early tax and financial planning.

“Most farmers in the Midwest will likely have large returns from selling their 2011 crop during 2012,” says Schnitkey. “Those farmers with very large yield losses this year will likely also have high crop insurance payments that will be counted as taxable income. As a result, many farmers will have doubly high taxable incomes in 2012, for which taxes will need to be paid in April, 2013.”

About 20% of the crop acres in Illinois had no crop insurance in 2012, and for uninsured farms like these, cash flow will likely be an issue for making 2013 farm input purchases, says Schnitkey. Yet, even for farms that had extensive crop insurance, the possibility of having to pay two years’ worth of income tax in one year, just prior to the start of a new cropping season, could pose a financial strain, he points out.

“Both tax planning and cash-flow planning will be critical for next year,” says Schnitkey. “A tax deferral on 2012 crop insurance payments might be possible, but farmers will need to meet certain IRS guidelines that require adequate documentation to qualify. I would advise farmers consult their tax advisor to look into it, sooner than later.”

Tax liability resolutions

2012 will be a particularly critical one for managing tax liability, concurs Dwight Raab, University of Illinois agricultural economist. “The last time we had a drought this severe was 1988, but we didn’t have revenue-based crop insurance products then, like we do now, which complicate tax planning decisions.”

Only insurance payments based on yield reductions, not price reductions, qualify for deferral, says Raab. In addition to several other important restrictions, farmers who qualify must defer the entire payment, not just a certain portion, he adds.

To obtain a deferral, a farmer must first be a cash-basis taxpayer, says Raab. “You also have to pass the 50% test, as far as having already established a pattern of selling 50% or more of your crops after the year you raise them,” he says.

Deferral determination

Another deferral constraint is that any yield reductions due to flood, drought or other natural disasters must occur on your own farm, and cannot be based on county average yields, says Gary Hoff, University of Illinois Extension taxation specialist. Examples of insurance policies that would not qualify for a deferral, either due to their being based on price or group risk, include: Revenue Protection (RP), Revenue Protection with harvest price exclusion (RP-HPE), Group Risk Plan (GRP) and Group Risk Income Protection (GRIP). Weather insurance payments are an additional income source that cannot be deferred, Hoff adds.

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