The type of insurance proceeds received must qualify for the election. Generally, federal payments received by the farmer will qualify if those payments are received:
- Because of destruction or damage to crops due to flood, drought or other natural disaster
- Because of a natural disaster that prevents the farmer from planting crops3
IRS guidance points out that federal payments made to the farmer under the Agricultural Act of 1949, 4 Title II of the Disaster Assistance Act of 19885 and Title I of the Disaster Assistance Act of 19896 will qualify for the deferral election.
However, IRS Notice 89-55 makes it clear that in order for a payment to be received by the farmer because of "destruction of or damage to crops" the farmer must suffer an actual loss. Notice 89-55 further states that insurance payments made to the farmer without regard to actual losses of the farmer, such as making a payment in the event that certain weather conditions do not occur, do not qualify as payments made because of "destruction of or damage to crops" and therefore, will not qualify for the deferral election.
Revenue protection insurance, for example, guarantees the farmer a particular level of revenue, with regard to actual market prices and the farmer's yield. Payments are not based by direct reference to any actual loss to the farmer. While an examination of the actual policy is advisable to determine if a policy payment will partially or entirely qualify, generally any type of crop insurance policy that guarantees a revenue or income level to the farmer will provide payments that may not entirely qualify for the deferral election. The following types of policies generally fall into this category:
- Revenue Protection (RP)
- Revenue Protection with Harvest Price Exclusion (RP-HPE)
- Group Risk Income Protection (GRIP)
Other types of crop insurance make payments based on a reference to the particular farmer's actual yield. A policy that makes payments solely based on a direct reference to the covered farmer's actual yield will make payments that will likely qualify for the deferral election. It is likely that the IRS will consider such insurance payments to be made because of an actual loss to the farmer because of destruction or damage to crops. However, variants of this type of "pure yield" policy may make payments to the farmer that may not qualify, in whole or in part. Policies generally falling into this category include Group Risk Plan (GRP) policies, which make payments based on county-wide crop losses instead of the covered farmer's actual yield. Yield-based policies, which make payments based on a combination of the farmer's yield and some price or income guarantee, may likewise not entirely qualify for deferral.
Proper tax advice is essential in this area in order to determine how much of a farmer's 2012 crop insurance payment qualifies for deferral to the 2013 tax year. Farmers who receive crop insurance payments in connection with the destruction or damage to crops in 2012 should bring a copy of their crop insurance policy to their tax preparer along with a copy of any calculations or other information the insurance company has provided in respect of the amount of payment that may qualify for deferral. This will allow the tax preparer to properly allocate and report the payment for 2012 and/or 2013. It is possible to have a payment partially qualify for deferral with the remaining amount reportable in the current year.