With the near record drought facing the United States during this summer of 2012, there will be large payouts of crop insurance proceeds. We are writing to inform you of the special tax election and strategies related to any crop insurance proceeds that you may collect for your 2012 crop.
Normally, crop insurance proceeds are taxable in the year of receipt. However, if a farmer meets certain requirements, an election is available to defer the proceeds for one year. The three major requirements are:
- The crop insurance proceeds relate to a damage or destruction caused by drought, flood or other major weather disaster. This means that insurance proceeds not directly related to a weather disaster, such as insurance providing revenue guarantees or price protection, cannot be deferred. If a claim includes both types of proceeds, an allocation between claims is required.
- The normal business practice of the farmer is that more than 50% of the crop proceeds are received in the year after harvest. This determination is based upon the past history of deferring over half of the crop sales for the crop activity that collected the insurance.
- The crop insurance proceeds were collected in the year of damage. If the damage occurred in 2012 but the proceeds are collected in 2013, deferral has occurred and no further election is permitted.
If you expect to have a major crop insurance claim for the 2012 crop year, it is extremely important to review this situation with your tax advisor. Normally, a farmer would defer the insurance proceeds to 2013. However, with the potential for increased tax rates in 2013, the expiration of bonus depreciation and the implementation of new taxes under the Affordable Care Act, this may be the year to pay income taxes at lower rates rather than defer income.
If you do not meet the requirements to defer crop insurance proceeds, other strategies are available to effectively defer the income for one year. Only by making a detailed income tax projection for 2012 and 2013 can the appropriate strategy be determined.
If you have any questions regarding either the rules on deferring crop insurance proceeds or related tax strategies for 2012, please contact us.