Taxation of Crop Insurance and Disaster Payments
Parman R. Green
Extension agricultural business management specialist
Weather variability is one of the largest sources of risk in agricultural production. Congress has recognized the impact of weather variability on crop production and the resulting variability to farm income by implementing a special tax provision.
Code Section 451(d) provides that, under certain circumstances, crop producers reporting on the cash method of accounting may elect to include crop insurance and disaster payments in income of the tax year following the taxable year of crop destruction or damage. To qualify for this election, the taxpayer must establish that the income from the destroyed or damaged crop would have been included in income for a taxable year following the year of destruction or damage under his or her normal business practices.
Additionally, crop disaster program payments received from the federal government qualify for Code Section 451(d) election if a natural disaster prevented a farmer from planting crops, or it destroyed or damaged crops that had already been planted.
John Farmer operates a grain farm and uses the cash method of accounting. During 2008 John received the following amounts of insurance proceeds for the damage caused to his crops by a June 20th hailstorm: corn $25,000, soybeans $20,000 and wheat $5,000.
If John can establish that under normal business practices he would have reported a substantial amount of the income from the 2008 crops in a subsequent tax year — he may report the insurance proceeds as 2008 income or he can elect to defer the $50,000 of insurance proceeds to 2009.
- Substantial portion of the crop is considered to be more than 50 percent.
- To qualify for deferral, the insured must suffer an actual — not a contingent loss.
- Because the insurance proceeds in the example above are attributable to crops representing a single trade or business, John may elect to defer all or none of the insurance proceeds. He may not allocate the proceeds between the two years.
- Taxpayers receiving insurance proceeds in the tax year following the tax year of destruction or damage include the proceeds as income in the year of receipt without needing to make the Section 451(d) election.
- Feed assistance and payments received under the Disaster Assistance Act of 1988 do not qualify for deferral under Code Section 451(d).
Making the election
To qualify for the deferral, a taxpayer must make an affirmative election of eligible payments under Code Section 451(d). The IRS has denied this deferral when insufficient information was included with the return to qualify as an affirmative election and details relative to the deferral were missing. For example, the mere disclosure that insurance proceeds are being deferred does not constitute an election under Code Section 451(d).
To make the election, attach a statement with your name and address to the return for the year your crop was destroyed or damaged and crop insurance proceeds were received. The following information must be included on the attachment:
- A statement that you are making an election under Code Section 451(d).
- Identification of crops destroyed or damaged.
- Declaration that under normal business practices the income derived from the crops that were destroyed or damaged would have been included in income for a year following the taxable year of such destruction or damage.
- Cause of destruction or damage of crops and the date(s) of such occurrence(s).
- Total amount of payments received from insurance, itemized with respect to each specific crop and with respect to the date of each payment.
- Name(s) of insurance carrier(s) from whom payments were received.
The election may be made on an amended return. However, once the election is made — it is binding for the taxable year for which it is made unless the commissioner consents to its revocation.
The following are free references for further investigation into this topic.
- IRS Publication 225 Farmer's Tax Guide
- IRS Publication 547 Casualties, Disasters and Thefts
The Farmer's Tax Guide is available at most local MU Extension centers.
IRS publications are on the Web.
Reviewed Febrauary 2009