You might be expecting a crop insurance indemnity payment this year. Maybe you expect it to be sizable and yet you are unsure of what the tax consequences could be. There are tools at your disposal to help manage your tax burden from those payments.
The time value of money tells us that we want to get our hands on money as soon as possible, but not pay taxes on it until later. This year for most farmers, crop insurance payments will provide most of their revenue. Consider using a deferment to get the most out of that money.
If you use the cash method of reporting in your operation, meaning you recognize your income and expenses as they flow through your checkbook, then you have the option to defer your crop insurance revenue recognition until the next calendar year. If you use the accrual method, you cannot choose to defer your crop insurance payment.
To use this option, you must be able to prove that you normally defer your crop revenue into the next calendar year. That simply means that you'll need to be prepared to show that you typically sell more than half of your bushels for that particular crop in the year after you raise the crop. For example, a farmer who raises 100,000 bushels of corn in a given crop year needs to be able to show that he typically sells at least 50,001 of those bushels in the following crop year in order to use the insurance deferment option.
Another important thing to know: if you are eligible for and choose to defer a crop insurance payment, you have to defer the entire payment for each crop. You can't defer only half of an insurance payment on your corn, for instance.
Of course, it's important to consult your tax advisor if you think you'd like to defer a crop insurance payment. Your tax professional should be able to answer your questions about deferment and make that election for you when they prepare and file your tax return.
Using a deferment as a tool gives you the ability to utilize cash in your operation before you pay the taxes on that income. The main point is to maximize how your money is working for you.
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