This has been a Goldilocks Year. For some farmers it has been the wettest crop ever. For some farmers it has been the driest crop ever. And for other farmers, everything has been just right. Many of the farmers in the first two groups will be visiting with their crop insurance agents, and scheduling a visit from an adjuster. Just like grain sales revenue, crop insurance payments are income and are taxable. And that opens a new can of worms.

As you are spending your working and leisure hours this fall in the combine cab, call your insurance agent on your cell phone and get a claim started for your flooded/droughty crop (you pick the correct term.) They may want a check strip left in the field for the adjuster to inspect later, but just follow the requirements. The issue at hand is tax planning for the indemnity check. Extension Specialists Robert Holcomb and Gary Hachfeld of University of Minnesota Extension and Mark Schull of Crop Insurance Services offer some tax planning suggestions.

Crop insurance indemnity checks and any federal disaster payments must be treated as ordinary farm income on your Schedule F. If your accounting is cash basis, and typically sell crops following their year of production, you can defer your crop insurance proceeds to next year for tax purposes. Farmers on an accrual system would pay tax on the insurance indemnity for the current year.

If you have Group Risk Protection or Group Risk Income Protection, which do not involve crop damage, but pay an indemnity based on the county average yield, then a producer must pay tax on the proceeds in the year it is received. That is because the GRP indemnity is not dependent upon actual crop damage and cannot be deferred under terms of the Internal Revenue Code (IRC 451(d). The same holds true for revenue insurance which is based on the decline in price of the crop, such as GRIP, CRC, or Revenue Assurance with the harvest price option.

Holcomb, Hachfeld, and Schull want farmers to know that tax deferral of crop insurance proceeds is prohibited if the policy is based on a calculation that does not include crop damage. They also want you and your tax advisor to jointly determine how much of your insurance payment can be deferred, and how much must be claimed as 2007 income, which they say is a gray area in the tax law.

To calculate your claim on revenue-based insurance, truck and wagon loads need to be connected to a field if you have optional units as part of your crop insurance policy. Your insurance agent will be able to confirm if a bin is to be measured. If your grain did not end up in the bin, but was chopped for silage, that is a significant diversion of the crop, and the adjuster would want to have seen a check strip in the field. If it is too late for that, you will likely not be able to receive an indemnity payment.

Check your calendar for filing any claim. September 30 is the deadline for filing a claim on small grains, and December 10 is the final day for corn an soybeans. For revenue insurance, the deadline is 45 days after the announcement of the fall harvest price.

If you were part of the drought crowd, your grain may have a test weight deficiency, and that is reason to file a claim.

Summary:
With the severe weather variability this year, it was a good time to have your crop protected with insurance, but as with any insurance program there are rules for filing claims. However, there are also rules in the tax law that determines if any indemnity can be deferred to next year, or must be paid as current year income. Indemnities on actual crop damage can be deferred for cash basis payers, but tax on indemnities for revenue insurance or county average insurance products must be paid in the year they are received.