Farming and ranching are risky. Crop insurance and frequent federal disaster payments can make the difference between staying in or going out of business. But recognizing these payments on an income tax return in the year of receipt can cause income bunching and higher tax rates. To address this issue, special tax law provisions sometimes allow farmers to defer the recognition of insurance and federal disaster payments for tax purposes. This election is made on Schedule F.
Although cash method farmers must generally recognize payments in the year of receipt, IRC § 451(f) sometimes allows farmers to make an election to postpone the recognition of income from crop insurance and federal disaster payments. This election allows qualifying payments for the destruction of insured crops to be deferred to the following taxable year. Many technical rules, detailed in this article, apply. Generally, however, the deferral is only available if the farmer typically would have sold the majority of the crop in the following year.
Example 1. Roberto grows wheat, corn, and soybeans on his farm. In 2021, a hailstorm ruins his wheat crop and Roberto experiences a 75 percent reduction in yield. Roberto typically sells his wheat in the year of harvest. Roberto receives a crop insurance check for the hail damage in the amount of $50,000. Roberto receives an IRS Form 1099-MISC from the crop insurance company with Box 9 showing $50,000. Roberto reports the crop insurance on his Schedule F as illustrated below using Lines 6a and 6b.
Example 2. If Roberto’s business practice was to sell his wheat crop in the year after it was produced, he could make the election to defer recognition of the crop insurance proceeds until the following year. In this example, Roberto reports the crop insurance on Line 6a but also checks the box on Line 6c and does not recognize the income on Line 6b as Illustrated below.
Example 3. Amanda raises milo, alfalfa, and soybeans. In 2020, her milo and soybean crops were flooded out and completely lost. She received $200,000 in crop insurance and an additional $150,000 in federal disaster relief because her farm was in a federally declared disaster area. Her longtime business practice was to sell her milo and soybean crops in the year following harvest. To prevent having to report two years of crop sales (her 2019 crop carried into 2020 and the insurance and disaster payments received in the fall of 2020), Amanda elected to defer these payments into 2021 to even out her business income. Therefore, as a best management practice, Amanda makes an entry on her 2021 accounting records with the $350,000 of deferred income and makes a copy of her 2020 IRS Form 1099-MISC to include with her 2021 papers. She reports this income as illustrated below on her Schedule F using Line 6d.
The Center for Agricultural Law and Taxation is a partner of the National Agricultural Law Center (NALC) at the University of Arkansas System Division of Agriculture, which serves as the nation’s leading source of agricultural and food law research and information. This material is provided as part of that partnership and is based upon work supported by the National Agricultural Library, Agricultural Research Service, U.S. Department of Agriculture.