
Many farmers will receive crop insurance this year and part of those proceeds likely cannot be deferred to 2022. We review the calculations.
A substantial portion of wheat farmers, especially spring wheat growers and soft-white winter wheat growers in the Pacific Northwest will receive crop insurance proceeds this year.
Most farmers understand that crop insurance proceeds related to “damage” can be deferred to the following year if they normally sell more than 50% of their crops in the year after harvest. However, this year, a large portion of wheat crop insurance will be related to price, not yield, and this portion cannot be deferred.
Here in the Pacific Northwest, the base price for soft-white wheat was $6.33 and the final harvest price was $9.86. Most of this $3.53 difference is a price component that cannot be deferred. The portion related to yield loss based on the $6.33 base price can be deferred.
As an example, assume the farmer has an APH of 100 bushels per acre and elected 85% RP coverage. The farmer elected to cover 85 bushels at $6.33 or $538. Final yield loss is 30 bushels at $6.33 is $190. The price loss is 30 bushels at $3.53 ($9.86-$6.33) or $106 which is the amount that cannot be deferred.
A substantial amount of the total crop insurance proceeds can deferred, but not all. However, if the farmer did not elect the harvest price option, then 100% of the proceeds could be deferred. Most crop insurance companies will calculate the yield and price component of your proceeds. I would expect the calculations to be similar to our example but may be slightly different (please feel free to reach out to us if our calculations are materially different than yours).
One caution. The IRS Farmers Tax Guide indicates on page 11 lower right hand corner that proceeds from revenue protection policies cannot be deferred. This is not substantial authority and most if not all of the tax advisors doing farmers tax returns will defer the “yield” component of RP policies.
But remember if Congress does increase tax rates in 2022, this may be a year where you decide not to defer crop insurance.
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