The "All or Nothing" Rule
A final rule to bear in mind if a deferral election is made in connection with crop insurance payments is that the election covers all the crops from a single trade or business of the farmer.7 If a farmer who receives a qualifying crop insurance payment during 2012 in connection with destruction or damage to two or more crops from a single farming trade or business must make the election to defer all the crop insurance payments until 2013 or not make the election at all and report all of the payments in 2012. However, if different crops are grown in separate farming trades or businesses, a separate election may be made for each.
Example 3. Jerry owns a farm that he operates as a sole proprietorship that produces wheat. He also owns another nearby farm that produces corn. He operates both farms as one farming trade or business. His records for both farms are kept on a combined basis and the income or loss from both farms is combined on one Schedule F each year. In 2012, severe drought conditions destroyed the wheat and the corn. He received qualifying crop insurance payments, which qualify to be deferred to 2013. Jerry can make the deferral election for all of the proceeds and report the proceeds in 2013. Conversely, he can report all the insurance proceeds in 2012 without making the election. He must treat all of the insurance proceeds from the wheat and corn in the same way because he operated the farms as one farming trade or business.
Example 4. Use the same facts as Example 4, except Jerry operates the wheat farm and the corn farm as separate farming businesses. He maintains separate records for each farm and the activity from each farm is reported on separate Schedule F forms each year. He treats them as separate and distinct farming operations. He receives qualifying crop insurance payments is 2012 in respect of drought losses to the wheat and the corn. Because Jerry operated the wheat and corn farms as separate businesses, he can choose whether or not to make separate elections on the insurance payments in respect of the wheat and corn losses and choose which payment to defer until 2013 and which to report in 2012. If Jerry wishes to elect to have the tax reporting of both the wheat insurance payment and the corn insurance payment deferred until 2013, he must make a separate election for each.
How to Make the Election
For crop damage and qualifying crop insurance payments that take place in the 2012 tax year, the farmer can make the deferral election by attaching a statement to the 2012 tax return (or amended return) with the following information:
- The farmer's name and address
- A statement that the election is being made under Internal Revenue Code §451(d) and Treasury Regulation §1.451-6
- A description of the specific crop(s) damaged or destroyed
- A statement that under the farmer's normal business practice the income from the destroyed or damaged crops would not have been included in the farmer's income until 2013
- A description of the cause of damage and the date it occurred
- An indication of the total amount and the date of each insurance or disaster payments received, itemized on a crop-by-crop basis
- The name of the insurance companies that the payment came from8
This 2012 election to defer the reporting of insurance proceeds is effective for the 2012 tax year only. A separate election is necessary for each tax year that the farmer wishes to defer the reporting of qualifying insurance proceeds.
1 IRC §451(d).
2 See Rev. Rul. 74-145, 1974-1 CB 113.
3 Treas. Reg. §1.451-6(a)(1).
4 IRS Notice 89-55, 1989-1 CB 698.
6 IRS Notice 90-28, 1990-1 CB 339.
7 Treas. Reg. §1.451-6.
8 Treas. Reg. §1.451-6(b)(1).