Tax Implications for the 2012 Drought

Crop Insurance: Crop insurance indemnities are generally included as income in the year in which the indemnities are received. However, a producer may elect to defer reporting the indemnities as income when received if the producer can show that the damaged crop would normally have been sold in the year following the year of production.

This election to defer reporting 2012 crop indemnities until 2013 applies to all of the crops for which crop insurance indemnities and disaster payments (if any) were received. If one defers, this means that the entire proceeds of crop insurance indemnity must be income in 2013. What test might be applied by IRS to qualify for deferral? One needs to be able to document that in the previous 3 years an average of more than 50% of the crops have been sold in the year after production. This would most likely document storage and deferral of sales as a normal business practice.

Only indemnities due to physical losses of production are eligible for deferral. Given the increases in corn and soybean prices from planting to harvest in 2012, the 2012 indemnities will be due entirely to physical losses. Unfortunately, indemnities paid by county-basis group insurance are not eligible for deferral because there is no direct relationship between the indemnity and an individual producer’s yield.

Indemnities cannot be reported as income before they are actually or constructively received. An indemnity received in 2013 for a 2012 crop is reported as income in 2013 regardless of when the producer normally sells the crop. This may cause problems for producers wanting to include indemnities in their income for 2012.

Given the very large number of claims in 2012, there may be a significant increase in the time needed to process a claim. Crop insurance agents may be able to indicate the likely time needed for processing. Checking information carefully in claim preparation helps avoid delays in processing.

Expected 2012 insurance claims of over $200,000 require up to a 3-year audit before the 2012 claim can be paid. Help your insurance agent start the audit process as soon as possible and be sure settlement sheets for grain are available from previous years to certify yields.

Be aware of possible aflatoxin contamination in corn. If aflatoxin is present, this generally reduces the value of the crop and thus increases insurance payout. However test for aflatoxin must be made before harvest and certified to the crop insurance representative. If aflatoxin is first discovered in stored grain, it is not covered for losses. Crop insurance coverage ends at harvest and thus does not cover losses in storage. So check for its presence and have testing done before harvest.

Producers should have alternative tax management strategies ready to be implemented depending on when the insurance indemnity is paid. As an example, having some grain on storage in December that could be sold in 2012 or 2013 provides more flexibility than having all of the crop insurance indemnities declared as income in either 2012 or 2013.

Livestock Tax Issues: Some livestock producers are reducing their livestock enterprises because of a lack of forages and high grain prices due to drought. Special federal income tax provisions are intended to reduce the impact of distressed sales of livestock in “excess” of normal.