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Extreme Weather, Extreme Taxes On Crop Insurance, It's All-or-Nothing at Tax Time
Marcia Zarley Taylor
DTN Executive Editor
Thu Oct 28, 2010 02:15 PM CDT

HADDONFIELD, N.J. (DTN) -- The day before the Great Deluge hit southern Minnesota in late September, Bob Ewert combined 50-plus-bushel soybeans and anticipated one of the best crops in his career. Instead, hail and a freak storm shredded his fields. Now he's collecting his largest federal crop and hail insurance payout ever and mulling how to repair the tax damage before year end.

"We've never had this kind of hail at harvest before," the Cottonwood County, Minn., grower said. On top of hail damage, area crops received 8 to 12 inches of rain in a 24-hour period. Ewert's soybean fields yielded as low as 9 bpa, but averaged 25 bpa.

Normally corn and soybean growers like Ewert market grain over two calendar years, but a crop insurance indemnity check bunches revenue into one payment.

In southwest Iowa, some growers are entitled to checks of up to $400 per acre on corn losses. And the size of their losses is leaving many disaster victims pondering the question: Do I need to wait until 2011 to receive my crop insurance check, or can I somehow defer recognition of the proceeds?

Tax Rules Don't Accommodate
"Not all accountants know or understand the tax rule, but growers don't have a lot of flexibility when reporting crop insurance proceeds to IRS," said Joan Porsch, a CPA with Kennedy and Coe LLC in Goodland, Kan. "Our farmers who grow both winter wheat and corn struggle with this all the time."

Many growers would like to split the proceeds between two tax years, but that's not an option under tax rules. "The only deferral election is for casualty 'production' losses and then it is an all-or-nothing rule," Porsch said.

Only Claims for Weather-Losses Deferrable
Andy Biebl, a CPA and principal with LarsonAllen LLC in Minneapolis agreed. What's more, he emphasized that it matters to the IRS whether your losses are due to natural disasters or a decline in price. In 2008, when most of the payments of $50 to $100 per acre on revenue-based crop insurance were due to price fluctuations and not weather, growers had to recognize such income in the year it was received. This year, anyone who receives a crop insurance payment must have suffered some kind of weather-related yield damage to collect, so the choices are more straightforward.

The tax code only allows deferral of crop insurance to the next tax year when the insurance is received from a casualty or natural disaster such as a drought, hail, frost, wind, flood or prevented planting, Biebl said. It does not offer flexibility to shift income between tax years for victims of a price disaster, such as big payouts for revenue-based insurance when prices dropped between spring and fall.

What's more, a second requirement allows crop insurance deferral only if the grower's normal practice is to report the income in the following tax year. A recent Tax Court case denied deferral for a grower on the grounds that his marketing contract committed only 35 percent of his sales in the next crop year (Nelson, 130 TC No. 5). The IRS and the Eighth Circuit Court of Appeals maintained that a grower must normally sell half of his crop the following year to qualify for the income tax deferral, Biebl added.

A third requirement is that each trade or business must defer all qualified payments if they choose the election, so growers must recognize all of their proceeds in 2010 (if they receive a check before Jan. 1), or defer all income to 2011.

That last provision will cause tax problems for some of his clients, said Keith Gehling, a crop insurance agent and commodity adviser with AgriSource Inc. in Salem, Iowa, said. Several are receiving payments in the $250-to-$400-per-acre range for 80 percent to 85 percent revenue insurance, due to corn losses and prevented plantings on soybeans.

Southeast Iowa averaged 20 inches or more of rain above average from April through October, or 175 percent to about 200 percent of normal. That excess moisture reduced some producers' average corn yields to 50 to 75 bushels, from a normal 170-200-bpa range, Gehling said. Soybeans that did get planted yielded an amazing 45 to 55 bpa.

"A lot of growers aren't breaking 100 bushels on their corn and are down 30 bushels to 100 bushels below last year's yields," he said. "I expect losses have to be pretty similar in western Illinois. It was just too wet for corn here this year."

Editor's Note: Join LarsonAllen CPA Andy Biebl for his year-end tax planning webinar, "Get Ready for Tax Time Bombs" on Dec. 2 by registering for the live event or rebroadcast at http://about.dtnpf.com/… Marcia Taylor can be reached at marcia.taylor@telventdtn.com