Generally, crop insurance proceeds received by a farmer using the cash method of accounting must be reported in the year in which the insurance proceeds are received. However, if both the farmer and insurance payment qualify, the farmer can elect to postpone the reporting of the crop insurance payment until the following year.1
To qualify for the election, the farmer must:
- Use the cash method of accounting for tax purposes
- Receive the insurance payment in the same tax year in which the crop damage occurred
- Show under normal business practices, the farmer would not have included the income from more than 50% of the damaged crops until the following year2
If the farmer does not receive the insurance payment until the year following the year of crop damage, the farmer must include the insurance payment in the year received.
Example 1.Henrietta is a corn producer. She uses the cash method of accounting. She typically sells her corn each year in late October or early November after harvesting. She reports the income from crop sales in the same year as the harvest. This has been her practice in past years. In 2012, her crop suffers severe drought damage. She receives her crop insurance payment in November 2012. Because Henrietta's normal business practice is to report the income from her corn in the same year it is received, she is not eligible to make the election to defer the reporting of the crop insurance payment until 2013. She must report the insurance payment in 2012 because this is the year in which she normally would have reported the crop sales proceeds for her corn.
Example 2.Use the same facts as in Example 1, but Henrietta doesn't receive the crop insurance payment until early 2013. Henrietta reports the insurance payment amount on her 2013 tax return, even though the payment was made in connection with the destruction of her 2012 corn crop. She is not able to defer reporting the crop insurance payment until 2014.