By: Janell Kuck, Maloney + Novotny
Tax reporting options for crop insurance proceeds
With the extremely wet year we had in 2019, this is a good time to address the income tax reporting options regarding reporting crop insurance proceeds. For cash basis farmers, crop insurance proceeds are taxable to the recipient when received. However, for insurance proceeds, prevent plant indemnities and federal disaster payments received for the destruction or damage to crops, an election is available to defer reporting the proceeds to the following tax year. Depending upon the farmer’s tax situation and other sources of income, it may make sense to defer proceeds related to the destruction or damage to crops to the following tax year.
To defer the reporting of crop insurance proceeds to the following year, the following steps should be taken:
- Identify which payments received in the current year relate to destruction or damage to current year crops. Payments received the year following the year the crops were destroyed or damaged do not qualify for deferral.
- Establish under his/her practice, if more than 50% of the income from the damaged or destroyed crops would have been reported in the following year. This would be determined by going back and documenting the timing of crop sales over the past several years to determine if they meet the test. If this test is not met, deferral is not permitted.
If it’s determined the farmer qualifies to defer the proceeds received, check box 6c of Schedule F (Form 1040) and attach an election statement to the return including the information required by the Internal Revenue Service. See page 12 of the 2018 IRS Publication 225, Farmer’s Tax Guide, for specific information required to be disclosed. Additionally, the election covers all crops representing a single trade or business.
Not all types of crop insurance proceeds qualify for the deferral. Examples include:
- Insurance proceeds received not attributable to the destruction or damage of crops
- Crop Revenue Coverage (CRC) – the policy may cover destruction or damage of crops by weather and the policy covers revenue losses caused by low price or low yield. This type of coverage would need to be evaluated to determine, which portion, if any, is eligible for deferral.
One item to note, when it comes time to prepare your 2019 income tax returns, it’s common practice to receive a payment from the crop insurance company for damages reduced by unpaid premiums. However, the Form 1099 the insurance company issues typically reports the gross payment prior to reduction for unpaid premiums. It’s important to record the gross payment to revenue and the unpaid premium withheld from the payment as an expense. Otherwise, you could potentially lose a deduction and overreport taxable income if you use the insurance proceeds reported on the Form 1099 on your tax return and not record the expense for the insurance proceeds withheld.
Market Facilitation Program Payments (MFP)
Market Facilitation Program Payments (MFP) are offered again this year and can be applied for through your local Farm Service Agency (FSA) office. For a cash basis farmer, these payments are taxable upon receipt of payment and are not eligible for deferral.