Indemnities cannot be reported as income before they are actually or constructively received. An indemnity received in 2013 for a 2012 crop would be reported an income in 2013, regardless of when the producer normally sells the crop. Because of the very large number of crop insurance claims filed for 2012, there was a significant increase in the time needed for insurance companies to process a claim.

Furthermore, a 2012 insurance claims of over $200,000 required a 3-year audit of the producer before the claim for 2012 losses could be paid. Although these situations are due to factors beyond a producer’s control, current tax law has no provisions that would permit reporting of indemnities as income before they were received.

Crop insurance proceeds paid in the year following the year of harvest must be reported as income when received. With the county-based insurances, Group Risk Plan (GRP) and Group Risk Income Plan (GRIP), yields and indemnities for corn, soybeans and most other crops are not determined until the year following the year of production. This is the tax treatment even if the producer’s normal business practice is to sell the crops in the year of harvest. There is no provision that would allow an acceleration of reporting. As previously discussed, this would also apply to delayed indemnity payments under crop and revenue insurance.

Producers can file amended tax returns within 3 years of when the return was filed or within two years from when the tax was paid, whichever is later. Although many farmers file and pay their taxes by March 1 to avoid estimated taxes, their filing deadline is April 15. Filing amended returns to take advantage of farm income averaging, and making careful use of additional first year depreciation and Section 179 expensing may provide more flexibility in managing income over several years.

Tip: In 2012 the prices of the 2012 December corn and November soybean futures used to determine insurance guarantees and indemnities increased sharply. The price of December corn futures averaged $5.68 in February and $7.50 in October. The price of November soybean futures prices increased from $12.55 to $15.39 over the same period. Almost all of the 2012 losses were due to low yields (physical losses) of corn and soybeans.

Calculation of Physical/Yield Losses

For crop insurance covering only physical losses of production (e.g., Yield Protection Plan and Group Risk Plan), determination of the loss is relatively straight forward. Let’s look at a soybean producer in 2013 with an Actual Production History (APH) yield of 50 bushels per acre. The projected price of 2013 soybeans, based on the November soybean futures was $12.87 per bushel.

Example 1:

Approved yield (APH) is 50 bushels per acre
Projected price of soybeans is $12.87 per bushel
Insurance coverage level is 75%
Actual yield of 45 bushels per acre

The final revenue guarantee level is 50 bushels x $12.87 x 75% = $482.63 per acre.

Calculated revenue is the 45 bushel actual yield x $12.87 projected price = $579.15 per acre.

Because the calculated revenue for actual production ($579.15) is larger than the insurance guarantee ($482.63), there is no indemnity. No indemnities would be paid until actual yields were less than 37.5 bushels per acre.

Calculation of Revenue Losses

Other crop insurance policies provide coverage for decreases in both yields and prices (e.g., Revenue Protection). Famers have shifted to insurance products based on revenue rather than yield alone. Over 95% of both the corn and soybeans acreages that were insured by yield or revenue insurances were insured for revenue coverage.

Let’s look at a corn producer in 2013 with an APH yield of 160 bushels per acre. The projected price of corn is based on the average closing price of the December corn futures during the month of February. The harvest price of corn is based on the average closing price of the December corn futures during October. The revenue guarantee is based on the higher of the price of December corn futures in February or November. In 2013, the February price was $5.65 and the November price was $4.39 for a decline of about 22.3% percent. If a producer had insured at the 75% coverage level, an indemnity could be determined as illustrated in Example 2.

Example 2:

APH yield is 160 bushels of corn per acre
Projected price of corn is $5.65 per bushel
Harvest price of corn is $4.39 per bushel
Insurance coverage level is 75%
Actual yield of 150 bushels per acre

The revenue guarantee level, based on November futures prices in February, is
160 bushels x $5.65 x 75% = $678.00 per acre

The revenue guarantee, based on the November futures price in October, is
160 bushels x $4.39 x 75% per acre = $561.92

Calculated revenue for actual production of 150 bushels at the $4.39 harvest price is 150
bushels x $4.39 = $658.50

Indemnity is the higher revenue guarantee minus actual revenue
$678.00 – $658.50 = $19.50 per acre.

Allocation of Losses