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.
For example, if Farmer Brown also received a crop insurance indemnity payment in 2015 for crop damage in 2015, then Farmer Brown could defer those crop insurance proceeds to 2016 by demonstrating the normal business practice would have been to defer a substantial amount of the income to the next tax year. IRS has interpreted “substantial amount” to be more than 50 percent. If Farmer Brown traditionally marketed 45 percent of the crop in year of harvest and 55 percent of the crop the next year, this potentially would meet the requirements to defer crop insurance proceeds to the next tax year.
In Nelson v. Commissioner of Internal Revenue, farming partnerships had a history of deferring 35 percent of the proceeds of crop harvest to the year after harvest. The Eighth Circuit Court of Appeals affirmed the IRS decision that 35 percent was not a substantial amount and the farming partnerships had to recognize all the crop insurance proceeds in the year received. This is one of the few reported court decisions looking at this issue and we are unsure if the 4th Circuit (the federal circuit that Maryland is in) would follow this decision.
If the crop insurance proceeds were not received till the year after the loss, then the farmer would have to recognize the proceeds in the year received. For example, if Farmer Brown had a loss in 2014 but did not receive crop insurance proceeds till 2015, then the proceeds would have to be recognized on the 2015 taxes.
I realize many of you may have not received crop insurance proceeds in 2015, but you may have received an ARC payment. ARC payments may not be deferred on 2015 taxes by recipients. For a better understanding on farm tax issues, check out the 2015 version of the Farmer’s Tax Guide published by the IRS each year.
26 C.F.R. § 1.451-6 (2016) https://www.law.cornell.edu/cfr/text/26/1.451-6
Internal Revenue Service. “Farmer’s Tax Guide.” Washington, DC: Publication 225, Internet site: https://www.irs.gov/publications/p225/ch03.html.
McEowen, Roger. “Eighth Circuit Affirms Tax Court – Crop Insurance Proceeds Not Deferrable.” Center for Agricultural Law and Taxation, Iowa State University: June 10, 2009. Internet site: https://www.calt.iastate.edu/system/files/CALT%20Legal%20Brief%20-%20Eighth%20Circuit%20Affirms%20Tax%20Court%20-%20Crop%20Insurance%20Proceeds%20Not%20Deferrable.pdf
Neiffer, Paul. “Can You Defer ARC/PLC Payments?” The Farm CPA Blog, Feb. 13, 2016. Internet Site: http://www.agweb.com/blog/the-farm-cpa-243/can-you-defer-arcplc-payments/
Nelson v. C.I.R., 568 F.3d 662 (8th Cir. 2009).