Can I Defer my 2012 Crop Insurance Check?

David Marrison, Associate Professor

Ohio and other Midwestern states were hit hard by the 2012 drought. With reported yields as low as 7 bushels to the acre for corn, many farmers will be relying on insurance and disaster payments to make ends meet. Due to the severity of this year’s drought, many farmers will be receiving a sizable insurance check with might put them in a unique tax bind.

Generally, farmers who use the cash accounting method must report income in the year in which they receive it. In 2012, this could create a bunching of income for farmers who would normally sell a portion or all of their crop in the year following harvest. If they receive an insurance or disaster payment for their 2012 crop before the end of the year, this could lead to sizable taxable income because they already have reportable receipts from selling their 2011 crop in 2012.

So what can farmers do? Thankfully, the Internal Revenue Service understands how farmers sell crops and allows for the postponement (for one year) of reporting compensatory payments received for crop loss under IRC section 451(d) and Treasury Regulation section 1.451-6. Generally, this exception applies when crops cannot be planted or are damaged or destroyed by a natural disaster such as a drought or flood. To qualify for the exception, a farmer must use the cash method for accounting and must show that it is his or her normal business practice for crop income to be reported in the year following the year it was grown (ie. sold in the following year).

The election must cover all eligible crops from a single farming business. If a farmer has more than one farming business, he or she must make a separate election for each farming business. The exception does not allow the taxpayer to postpone or accelerate reporting a crop loss payment if the payment is received the year after the year of the crop loss. So if the farmer receives his insurance payment in 2013 for the 2012 affected crops, it cannot be deferred.

To choose to postpone reporting crop insurance proceeds received in the current year, farmers should report the amount received on line 8a of the Schedule F. However this amount is not included as a taxable amount on line 8b. Check the box on line 8c and attach a statement to your tax return. It must include the taxpayer’s name and address and contain the following information:

• A statement that you are making a choice under IRC section 451(d) and Treasury Regulation section 1.451-6
• The specific crop or crops destroyed or damaged
• A statement that under your normal business practice you would have included income from the destroyed or damaged crops in gross income for a tax year following the year the crops were destroyed or damaged
• The cause of the destruction or damage and the date or dates it occurred
• The total payments you received from insurance carriers, itemized for each specific crop and the date you received each payment
• The name of each insurance carrier from whom you received payments

Potential Snags
Some farmers receive compensation under revenue protection policies purchased from
a crop insurance agency. These payments are based on the price, the quantity, and the quality
of the commodity produced. Only the payment for destruction or damage is eligible for the deferral. Therefore, a farmer who receives compensation from a revenue protection policy must determine the portion of the payment that is due to crop destruction or damage, rather than due to a reduced market price.

Some farmers may also receive payments under group risk protection (GRP) and group risk income protection (GRIP) insurance. These policies pay an insured producer if the county average yield or average revenue falls below the specified level of coverage (typically 70-95%). Because information on average county yields and the average revenues necessary to compute payments for corn and soybeans are generally not available until the year following the year of loss, these insurance payments are not eligible for deferral. As with proceeds from an revenue protection policies, proceeds from a GRP, GRIP, or other risk management policy qualify for the I.R.C. § 451(d) election to postpone the income to the following year only to the extent the proceeds are paid for damage or destruction of a crop. Because there is no direct relationship between an individual producer’s yield and insurance payments under GRP and GRIP, insurance payments from those policies are not eligible for deferral.

Professional Assistance:
Because of some of the potential ambiguities in the I.R.C. § 451(d) election, it is suggested that farmers meet with their tax accountant to see if this election is in the best interest for their operation. Tax practitioners will learn more about this subject at the OSU Income Tax Schools which will be held across Ohio this fall. More information about these schools can be found at: http://incometaxschools.osu.edu

Sources:
2012 Land Grant University Tax Education Foundation Inc. Tax Work Book

Internal Revenue Service. Find article at: http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Crop-Insurance-and-Crop-Disaster-Payments—Agriculture-Tax-Tips

Ohio State University Extension is hosting a workshop on shale energy development on Nov. 10.

“Shale and You: A Workshop for Landowners and Communities” will be held at the Pritchard Laughlin Civic Center, 7033 Glenn Highway, Cambridge, from 1 p.m. to 6 p.m. Registration is $10 and must be received by Monday, Nov. 5, by the Guernsey County office of OSU Extension in Old Washington, Ohio. Registration forms with the office’s address and other details can be downloaded (PDF) at http://go.osu.edu/shaleandyouPDF or by going to http://shalegas.osu.edu and clicking on the “Shale and You” event under “Upcoming Extension Events.”

“What we hope to do is help landowners and community leaders make the best decisions possible,” Hall said. “We’re not attempting to discuss the pros and cons of such development — that’s something for individuals and policy-makers to consider. As an educational institution, OSU Extension simply aims to provide relevant information to help inform those who are dealing with shale energy development.”

The workshop will include presentations by OSU Extension educators on:
• Update on Ohio Shale Development and Activity, by Chris Penrose, OSU Extension educator in Morgan County.
• Community and Strategic Planning, by Eric Romich, OSU Extension field specialist in energy development.
• Tax Issues for Communities and Landowners, by Dave Marrison, OSU Extension educator in Ashtabula and Trumbull counties.
• What to Do When “Sudden Wealth Happens,” by Polly Loy, OSU Extension educator in Belmont County.
• Leasing Issues for Farms and Rural Land, by Clif Little, OSU Extension educator in Guernsey County, and Peggy Hall, OSU Extension Agricultural Law Program.
• Pumping the Product: Pipeline Easements and Construction, by Mark Landefeld, OSU Extension educator in Monroe County, and Chris Zoller, OSU Extension educator in Tuscarawas County.
• Natural Resource Issues: Where to Find Helpful Resources, by Steve Schumacher, OSU Extension educator in Belmont County, and Mike Lloyd, OSU Extension educator in Noble County.
• A Landowner’s Point of View, featuring Schumacher and a panel of landowners who have dealt with shale development directly.

The program ends with “What If Problems Arise,” featuring a panel of Extension educators and moderated by Dale Arnold of the Ohio Farm Bureau. In addition, tables with information in the lobby of the auditorium will be staffed throughout the afternoon to allow participants to get more information on issues they are specifically concerned about, Hall said. “OSU Extension has been a leader in providing educational programs to landowners and community leaders who are being confronted with what are sometimes very difficult decisions about this issue,” Hall said. “We’ve offered more than a hundred educational sessions on topics such as lease agreements and pipeline easements in the last two years and have reached more than 12,000 people. But this is the first time we’ve pulled together a program with so much of our expertise in one place. I think it will be a valuable program for anyone interested in learning more about these issues.”

By Martha Filipic
Source: Peggy Kirk Hall
614-247-7898
aglaw@osu.edu

Section 179, Bonus Depreciation and Tax Strategies

By: Chris Bruynis, Assistant Professor/Extension Educator, OSU Extension Ross County

Harvest is well underway, and even with the lower yields, farmers are starting to look at minimizing their tax liability for 2012. Farmers and their tax accountants are fully aware of the strategies and tools available to them, especially if they are using a cash accounting method. Farmers have historically delayed the sale of crops into the next calendar year and purchased inputs for the next year’s crop. In the past several years there have also been IRS policies that encouraged investment in equipment and buildings.  Section 179 and Bonus Depreciation are the most common ones used by farmers.

The Section 179 tax provision allows businesses to deduct the full amount of the purchase price of equipment (up to certain limits).  It can be elected for either new or used equipment purchased in fiscal calendar year of the business.  In 2012, the deduction amount is $139,000 but is slated to be reduced to $25,000 in 2013. Farmers can elect to use all or part of the deduction amount. An example would be that a farmer purchases new equipment for $100,000 and used equipment for $75,000 in 2012. She can deduct the $75,000 on the used equipment and $64,000 on the new equipment for a total of $139,000 using Section 179. The $36,000 remaining value of the new equipment would then be eligible for bonus depreciation or be placed on the regular depreciation schedule. Section 179 deductions are limited to the amount of net operating income generated by the farm and cannot be used to create a net operating loss.

Bonus depreciation has been a more recent tax law and also geared to encourage investment in equipment and buildings.  For 2012 the bonus depreciation rate is 50% of the purchase price and can only be applied to new items. Bonus depreciation is currently slated to disappear in 2013. An example would be that a farmer purchased a new multi-purpose building for equipment storage and the farm shop for $120,000. He can use the bonus depreciation to deduct 50% or $60,000 of the purchase price on his 2012 taxes.  Bonus depreciation can be used regardless of net operating income even if it results in a net operating loss.

Typically, Section 179 rules should be applied first and then bonus depreciation rules. The exception to this would be if the farm has no net operating income resulting in the farm being ineligible to use Section 179.

While using these tax tools might be a good strategy to lower taxes this year, farmers and their tax accountants need to be careful not to create future tax liability problems. With Section 179 slated to return to $25,000 in 2013 and bonus depreciation being phased out, these tools will not have the same tax management ability as they currently do. Farmers and their tax preparers need to think strategically about future tax management. The goal should never be to eliminate income taxes but to have net operating income that keeps the farmer in the lowest possible tax bracket long term.  This might be the year not to fully utilize Section 179 and bonus deprecation, but to leave more asset value to depreciate with more traditional depreciation methods for future years.  This strategy does result in increased taxes this year but could be beneficial in keeping farmers out of higher tax brackets in the future.  Tax rates, in my opinion, are unlikely to go down, regardless of what the presidential candidates are promising.

2013 Ohio Field Crop Enterprise Budgets

By: Barry Ward, OSU Extension, Leader, Production Business Management, Department of Agricultural, Environmental, and Development Economics and Greg Reinhart, Undergraduate Student Intern, OSU Department of Agricultural, Environmental and Development Economics

Budgeting helps guide you through your decision making process as you attempt to commit resources to the most profitable enterprises on the farm. Crops or Livestock? Corn, Soybeans, Wheat, Hay? We can begin to answer these questions with well thought out budgets that include all revenue and costs. Without some form of budgeting and some method to track your enterprises’ progress you’ll have difficulty determining your most profitable enterprise(s) and if you’ve met your goals for the farm.

Budgeting is often described as “penciling it out” before committing resources to a plan. Ohio State University Extension has had a long history of developing “Enterprise Budgets” that can be used as a starting point for producers in their budgeting process.

Newly updated Enterprise Budgets for 2013 have been completed and posted to the Farm Management Website of the Department of Agricultural, Environmental and Development Economics. Updated Enterprise Budgets can be viewed and downloaded from the following website:

http://aede.osu.edu/programs/farmmanagement/budgets

Enterprise Budget projections updated so far for 2013 include: Corn-Conservation Tillage; Soybeans-No-Till (Roundup Ready); Wheat-Conservation Tillage, (Grain & Straw).

Our enterprise budgets are compiled on downloadable Excel Spreadsheets that contain macros for ease of use. Users can input their own production and price levels to calculate their own numbers. These Enterprise Budgets have color coded cells that allow users to plug in numbers to easily calculate bottoms lines for different scenarios. Detailed footnotes are included to help explain methodologies used to obtain the budget numbers. Budgets include a date in the upper right hand corner of the front page indicating when the last update occurred.

Families and the 2012 Drought

By James S. Bates, Ph.D., CFLE & Assistant Professor

This past July, Governor John R. Kasich signed Executive Order 2012-11K, which instructs state agencies to help farmers minimize the negative effects of this year’s drought. Upon request from Governor Kasich, in September of this year, the Secretary of the U.S. Department of Agriculture, Thomas Vilsack, designated 85 Ohio counties as Secretarial Disaster areas. While much of the focus of disaster relief is designed to mitigate negative financial and economic impacts, family relationships are, in the end, what is most impacted by drought.

How are family relationships affected by the drought? The logic is simple:
1. Smaller livestock and crop yields = less revenue to the farm family business and employees;
2. Less revenue to the family business and employees = reduced income to the family (possible layoffs of employees);
3. Reduced income to families = increased stress, increased possibility of depressive symptoms, decreased possibility of positive well-being, and increased tension between spouses and between parents and children

Family and Consumer Science OSU Extension personnel are here to help! We know that Ohioans are resilient, especially farm families, but sometimes it’s good to be reminded of ways to address adversity before it gets the best of us. Professor Froma Walsh (2006) identified several characteristics of resilient families that may help farm families get through this tough time (see also http://fyi.uwex.edu/familyresiliency/).
• Make meaning out of adversity and challenge
• Maintain a positive outlook
• Rely on spirituality and higher power
• Be flexible to change
• Remain connected with others
• Obtain support through social and economic sources
• Communicate clear, consistent messages
• Openly share emotions
• Problem solve collaboratively

We’ve also compiled a list of informational resources to assist families with pressing issues related to family finances, family stress and crisis, family communication and conflict resolution and much more. These resources are available at our website: http://fcs.osu.edu/resources/drought.

Reference: Walsh, F. (2006). Strengthening Family Resilience. New York: Guilford Press.

Farm Bill Expiration Impacts FSA Programs

By: Chris Bruynis, Assistant Professor & Extension Educator, OSU Extension, Ross County

Agriculture Secretary Tom Vilsack released the following statement today. He stated that “many programs and policies of the U.S. Department of Agriculture were authorized under the Food, Conservation and Energy Act of 2008 (“2008 Farm Bill”) through September 30, 2012. These include a great number of critical programs impacting millions of Americans, including programs for farm commodity and price support, conservation, research, nutrition, food safety, and agricultural trade. As of today, USDA’s authority or funding to deliver many of these programs has expired, leaving USDA with far fewer tools to help strengthen American agriculture and grow a rural economy that supports 1 in 12 American jobs. Authority and funding for additional programs is set to expire in the coming months. Without action by the House of Representatives on a multi-year Food, Farm and Jobs bill, rural communities are today being asked to shoulder additional burdens and additional uncertainty in a tough time. As we continue to urge Congress to give USDA more tools to grow the rural economy, USDA will work hard to keep producers and farm families informed regarding those programs which are no longer available to them.”Many programs and policies of the U.S. Department of Agriculture (USDA) were authorized under the Food, Conservation and Energy Act of 2008 (“2008 Farm Bill”) through Sep. 30, 2012.  These include a great number of programs impacting millions of Americans, including programs for farm commodity and price support, conservation, research, nutrition, food safety, and agricultural trade.

What this means is that Farm Services Agency cannot take new applications for programs until there is new guidelines passed by congress in the form of a new Farm Bill. This does not mean their doors are closed. FSA employees continue to work on existing contracts approved prior to end of the 2008 Farm Bill and on programs that have authorized funding beyond September 30, 2012. County FSA offices will be designing some strategy to track interest for producers asking about new CRP, CREP offers, etc. and work with these producers once the new rules are in place.

However, USDA continues to analyze the full impacts of the expiration of the 2008 Farm Bill and has produced a tentative list of programs to which new commitments cannot be made. The following programs are deemed to have expired with the end of the 2008 Farm Bill:

  • Dairy Forward Pricing Program
  • Milk Income Loss Contract Program
  • Dairy Promotion and Research Program
  • Conservation Reserve Program
  • Wetlands Reserve Program
  • Grassland Reserve Program
  • Market Access Program
  • Foreign Market Development Cooperator Program
  • Technical Assistance for Specialty Crops
  • Emerging Markets Program
  • Senior Farmers’ Market Nutrition Program
  • Organic Agriculture Research and Extension Initiative
  • Specialty Crop Research Initiative
  • Beginning Farmer and Ranchers Development Program
  • Healthy Forest Reserve
  • Biomass Research and Development Initiative
  • Biomass Crop Assistance Program
  • Farmers’ Market Promotion Program
  • Specialty Crop Block Grants
  • National Clean Plant Network
  • National Organic Certification Cost-Share
  • Outreach and Technical Assistance for Socially Disadvantaged Farmers or Ranchers

This is a partial list of programs that are understood to no longer be funded and new applications cannot be accepted until a new Farm Bill is passed.