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Tax Planning in an Unusual Year: Prevented Planting Indemnity Payments, Market Facilitation Payments and Cost-Share Payments

Written by Barry Ward, Leader, Production Business Management & Director, OSU Income Tax Schools

Prevented Planting Crop Insurance Indemnity Payments

With unprecedented amounts of prevented planting insurance claims this year in Ohio and other parts of the Midwest, many producers will be considering different tax management strategies in dealing with this unusual income stream. In a normal year, producers have flexibility in how they generate and report income. In a year such as this when they will have a large amount of income from insurance indemnity payments the flexibility is greatly reduced. In a normal year a producer may sell a part of grain produced in the year of production and store the remainder until the following year to potentially take advantage of higher prices and/or stronger basis. For example, a producer harvests 200,000 bushels of corn in 2019, sells 100,000 bushels this year and the remainder in 2020. As most producers use the cash method of accounting and file taxes as a cash based filer, the production sold in the following year is reported as income in that year and not in the year of production. This allows for flexibility when dealing with the ups and downs of farm revenue.

Generally, crop insurance proceeds should be included in gross income in the year the payments are received, however Internal Revenue Code Section (IRC §) 451(f) provides a special provision that allows insurance proceeds to be deferred if they are received as a result of “destruction or damage to crops.”

As prevented planting insurance proceeds qualify under this definition, they can qualify for a 1 year deferral for inclusion in taxable income. These proceeds can qualify if the producer meets the following criteria:

  1. Taxpayer uses the cash method of accounting.
  2. Taxpayer receives the crop insurance proceeds in the same tax year the crops are damaged.
  3. Taxpayer shows that under their normal business practice they would have included income from the damaged crops in any tax year following the year the damage occurred.

The third criteria is the sometimes the problem. Most can meet the criteria, although if producers want reasonable audit protection, they should have records showing the normal practice of deferring sales of grain produced and harvested in year 1 subsequently stored and sold in the following year. To safely “show that under their normal business practice they would have included income from the damaged crops in any tax year following the year the damage occurred” the taxpayer should follow IRS Revenue Ruling 75-145 that requires that he or she would have reported more than 50 percent of the income from the damaged or destroyed crops in the year following the loss. A reasonable interpretation in meeting the 50% test is that a farmer may aggregate the historical sales for crops receiving insurance proceeds but tax practitioners differ on the interpretation of how this test may be met.

One big problem with these crop insurance proceeds is that a producer can’t divide it between years. It is either claimed in the year the damage occurred and the crop insurance proceeds were received or it is all deferred until the following year. The election to defer recognition of crop insurance proceeds that qualify is an all or nothing election for each trade or business IRS Revenue Ruling 74-145, 1971-1.

Tax planning options for producers depend a great deal on past income and future income prospects. Producers that have lower taxable income in the last 3 years (or tax brackets that weren’t completely filled) may want to consider claiming the prevented planting insurance proceeds this year and using Income Averaging to spread some of this year’s income into the prior 3 years. Producers that have had high income in the past 3 years and will experience high net income in 2019 may consider deferring these insurance proceeds to 2020 if they feel that this year may have lower farm net income.

Market Facilitation Payments

When the next round(s) of Market Facilitation Payments (MFPs) are issued, they will be treated the same as the previous rounds for income tax purposes. These payments must be taken as taxable income in the year they are received. As these payments are intended to replace income due to low prices stemming from trade disputes, these payments should be included in gross income in the year received. As these payments constitute earnings from the farmers’ trade or business they are subject to federal income tax and self-employment tax. Producers will almost certainly not have the option to defer these taxes until next year. Some producers waited until early 2019 to report production from 2018 and therefore will report this income from the first round of Market Facilitation Payments as taxable income in 2019.

Producers will likely not have the option of delaying their reporting and subsequent MFP payments due to the fact they are contingent upon planted acreage reporting of eligible crops and not yield reporting as the first round of MFP payments were.

Cost Share Payments

Increased prevented planting acres this year have many producers considering cover crops to better manage weeds and erosion and possibly qualify for a reduced MFP. There is also the possibility that producers will be eligible for cost-share payments via the Natural Resources Conservation Service for planting cover crops. Producers should be aware that these cost-share payments will be included on Form 1099-G that they will receive and the cost-share payments will need to be included as income.

You are advised to consult a tax professional for clarification of these issues as they relate to your circumstances.

This article is being reposted with the author’s permission from the Ohio Ag Manager blog.

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Risk Management Agency moves date for harvesting cover crops on Prevented Planting acres

With many farmers in Ohio unable to plant before the Final Planting Date for crop insurance, questions are arising about planting and harvesting cover crops on those prevented planting acres.  USDA Risk Management Agency (RMA) rules allow operators to plant cover crops on prevented planting acres and to hay, graze, or cut the cover crops for silage after the posted “harvest date.”  In previous years, the harvest date for cover crops was November 1.   If an operator harvested the cover crop before that date, the prevented plant payment would be reduced from 100% to 35%.

The RMA has changed the harvest date for 2019, however.  In response to reduced livestock feed supplies that will result from the loss of planted acres this year, the RMA has moved up the cover crop harvest date to September 1.  An operator who plants a cover crop after the Final Planting Date and then cuts the crop for forage on or after September 1 can still receive 100% of the prevented plant payment, even if the operator sells the forage and regardless of whether the operator planted the cover crop during or after the Late Planting Period.  The Final Planting Date in Ohio was June 5 for corn and June 20 for soybeans; the Late Planting Period ended on June 20 for corn and runs until July 15 for soybeans.  Note, too, that a cover crop that was in the ground before the Final Planting Date but was not terminated because the operator couldn’t plant the intended corn or soybean crop can also be harvested for forage on or after September 1.

The RMA’s chart below illustrates payment scenarios for cover crops planted and harvested on prevented planting acres.

Capture

Other requirements for cover crops

While the cover crop harvest date seems pretty straightforward, don’t be fooled–crop insurance provisions can be tricky.  Farmers planning to put out cover crops on prevented plant acres should work closely with their crop insurance agents to ensure that all policy provisions and documentation requirements are met.

An initial requirement is that the cover crop planted must meet the definition of an “acceptable cover crop” for crop insurance purposes.   The RMA considers an acceptable cover crop as one that is recognized by agricultural experts as agronomically sound for the area for erosion control or other purposes related to conservation or soil improvement and planted at the recommended seeding rate.  OSU agricultural experts can help provide guidance on acceptable cover crops.

Operators should also be aware that many seed licenses, particularly for bio-engineered seeds, restrict the use of the seed to grain production only.  In those situations, planting the seed for a cover crop or harvesting it for silage would violate the seed licensing contract and create a liability situation for the operator.

Additionally, note that crop insurance provisions prohibit harvesting the cover crop for grain or seed, and an operator who does so will lose all of the prevented plant payment.  The cover crop harvest can also impact other provisions, such as the farm’s Actual Production History (APH) yields.  These and other provisions highlight the importance of a close working arrangement with the crop insurance agent in order to comply with RMA’s cover crop provisions.

For RMA’s guidance on Prevented Planting Flooding, go to this page.  The site contains a comprehensive list of questions and answers on prevented planting, along with information about the 2019 cover crop provisions.

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Prevented planting, idle land and CAUV taxation

The decision on whether to take prevented planting is a tough one, but don’t let concerns about increased property taxes on idle land enter into the equation.  Ohio’s Current Agricultural Use Valuation program allows landowners to retain the benefit of CAUV tax assessment on agricultural land even if the land lies idle or fallow for a period of time.

Ohio’s CAUV program provides differential property tax assessment to parcels of land “devoted exclusively to agricultural use” that are ten acres or more or, if less than ten acres, generated an average gross income for the previous three years of $2,500 or more from commercial agricultural production.  Timber lands adjacent to CAUV land, land enrolled in federal conservation programs, and land devoted to agritourism or bio-mass and similar types of energy production on a farm also qualify for CAUV.

There must have been some farmers in the legislature when the CAUV law was enacted, because the legislature anticipated the possibility that qualifying CAUV lands would not always be actively engaged in agricultural production.   The law allows CAUV land to sit “idle or fallow” for up to one year and remain eligible for CAUV, but only if there’s not an activity or use taking place on the land that’s inconsistent with returning the land to agricultural production or that converts the land from agricultural production.  After one year of lying idle or fallow, a landowner may retain the CAUV status for up to three years by showing good cause to the board of revision for why the land is not actively engaged in agricultural production.

The law would play out as follows.  When the auditor sends the next CAUV reenrollment form for a parcel that qualifies for CAUV but was not planted this year due to the weather, a landowner must certify that the land is still devoted to agricultural production and return the CAUV form to the auditor.  The auditor must allow the land to retain its CAUV status the first year of lying idle or fallow, as long as the land is not being used or converted to a non-agricultural use.  If the land continues to be idle or fallow for the following year or two years, the auditor could ask the landowner to show cause as to why the land is not being used for agricultural production.  The landowner would then have an opportunity to prove that the weather has prevented plans to plant field crops, as intended by the landowner.  After three years, the landowner would have to change the land to a different type of commercial agricultural production to retain its CAUV status if the weather still prevents the ability to plant field crops on the parcel.  Other agricultural uses could include commercial animal or poultry husbandry, aquaculture, algaculture, apiculture, the production for a commercial purpose of timber, tobacco, fruits, vegetables, nursery stock, ornamental trees, sod, or flowers, or the growth of timber for a noncommercial purpose, if the land on which the timber is grown is contiguous to or part of a parcel of land under common ownership that is otherwise devoted exclusively to agricultural use.

Being forced out of the fields due to rain is a frustrating reality for many Ohio farmers today.   One positive assurance we can offer in the face of prevented planting is that farmers won’t lose agricultural property tax status on those fields this year.  Read Ohio’s CAUV law in the Ohio Revised Code at sections 5713.30 and 5713.31.

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