Updated: Jul 2, 2020
This post should not be construed as tax advice.
Tax season is upon us and hopefully you have taken all your documents to your accountant. In 2015, some of you may have received an Agriculture Risk Coverage (ARC) County payment or a Price Loss Coverage (PLC) payment, depending on the Farm Bill program you elected to participate in. Some of you may have also received an indemnity payment from 2015 crop insurance coverage. Many of you may be curious; can you defer these payments to 2016? The answer will depend on the program.
ARC and PLC payments are considered agricultural program payments, under Internal Revenue Service (IRS) rules. Agricultural program payments must be recognized on your taxes in the year received. For example, if Farmer Brown receives a 2014 ARC payment in 2015, then that payment would need to be recognized on Farmer Brown’s 2015 Schedule F. Farmer Brown would not be able to defer the 2014 ARC payment till 2016.
Crop insurance indemnity payments can be deferred in certain situations for those utilizing cash accounting. To review: cash accounting is simply recognizing income when it is received and expenses when paid. For example, Stan harvests corn in 2014 and stores a portion of his crop. Stan sells a portion of the stored crop in 2015, and would recognize that income on his taxes in 2015. Farms may also choose to use the other accounting method — the accrual method, used by all other industries. Accrual accounting is when you report income and expenses in the year they occur. The idea behind accrual accounting is to allow for the matching of income and expenses.
Currently, IRS rules allow for a producer to defer crop insurance proceeds received as a result of the destruction of, or damage to, crops to the tax year after the destruction or damage of the crop. In order to defer the payments, the producer must demonstrate that the producer’s normal business practice would be to defer a substantial amount of the income to the following tax year.