Farming, Taxes, and Planning for the Future (Part I)

In parts of the Midwest we had snow in May and excessive rain and flooding in June, not to mention a drought over the summer months. As a result, many farmers were unable to plant their crop or will have a short crop to harvest. Thankfully, due to federal crop insurance, numerous producers had the ability to make a prevented planting crop insurance claim. As the prevented planting claims have now been worked and the checks are either in the bank or on the way, now the question on producers’ minds turns to the tax consequences associated with the prevented plant insurance indemnity and possible harvest losses.

Like other crop insurance indemnities, prevented plant insurance proceeds are subject to deferral under certain conditions. Also, deferring insurance proceeds is an all or nothing election; both prevented plant and other crop insurance indemnities are tied together for the purpose of the election. The conditions required for deferral are as follows:

1. The producer must use cash method of accounting;

2. The producer receives insurance proceeds in the year the crop is damaged; and

3. The producers can show that it is their normal business practice to market the majority of the crop in the subsequent year.

Many farmers have chosen to defer income to the subsequent year. Using current year expenses to offset prior year income has worked well as both commodity prices and expenses have fluctuated. However, changes in tax law may warrant a deeper look into your tax situation. Key provisions of the American Taxpayer Relief Act of 2012 are set to expire at the end of the year. In addition, 2013 ushered in higher income and capital gains tax rates.

Accompanying the higher tax rates, the investment income surtax took effect. All of which could create a substantial tax liability if income isn’t managed properly. With uncertainty surrounding the expiration of depreciation provisions in 2014 and substantial fluctuations in commodity prices, tax planning has become increasingly more important. As with all good tax planning, a multi-year approach should be adopted to ensure that a positive tax situation in one year does not result in a negative tax situation in future years.

Remember, the best advice is to contact your tax advisor for questions related to your operation.

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