2012 Drought and Income Tax Deferral of Crop Insurance, Disaster Payments

If harvest price exceeds the base price, consider the following example

Example 2

The facts are the same as in the previous example, except that the harvest price of corn was $7.50/bu. Al’s final revenue guarantee under the policy is 170 bu./acre x $7.50 x.75 = $956.25/acre. Al’s calculated revenue is his actual yield (100 bu./acre) multiplied by the harvest price ($7.50/bushel) which equals $750/acre. Al’s insurance proceeds are the guaranteed amount ($956.25/acre) less the calculated revenue ($750), or $206.25/acre. His yield loss is the 70 bu./acre which is then multiplied by the harvest price of $7.50/bu., for a physical loss of $525/acre. Al’s price loss is zero because the harvest price exceeded the base price.

So, to summarize, Al has the following:

• Total loss (per acre): $525 (physical loss) + $0.00 (price loss)
• Physical loss as percentage of total loss: $525/525 = 1.00
• Insurance payment: $206.25/acre
• Insurance payment attributable to physical loss (which is deferrable): $206.25 x 1.00 = $206.25/acre
• Portion of insurance payment that is not deferrable: $206.25 - 206.25 = $0.00

 

Observation

Normally, if the price of crop at the time of harvest exceeds the base price, the physical loss will constitute 100% of the total loss, and the entire insurance payment will be deferrable. However, if insurance proceeds for physical loss to crops are collected before the harvest price is determined and the harvest price ultimately exceeds the base price, any additional payment attributable to the price difference could be deemed by IRS to be attributable to revenue loss that would not be eligible for deferral.

Note:

For policies not based on physical loss (such as a GRP), payments received are not deferrable. The same holds true for an Average Crop Revenue Election (ACRE) payment because it is received after the end of the marketing year and in a year after the year the crop at issue is produced. There is no additional ability to defer income to a later year if it is actually received in a year following the year of crop loss.