Written by: Kyle Meyer, CPA

This newsletter is meant to give you a brief overview of how insurance proceeds are treated in the tax law and give you some strategies to avoid unnecessary taxes.

Crop Insurance

Proceeds from crop insurance, as a result of crop damage or revenue protection, are considered taxable income. These are normally taxable in the year received, although proceeds related to crop damage are allowed to be deferred one year if you meet the following conditions.

  • You use the cash method of accounting.
  • You receive the crop insurance proceeds in the same tax year the crops are damaged.
  • You can show that under your normal business practice you would have included income from the damaged crops in any tax year following the year the damage occurred.

Deferring crop insurance income is a tax election that covers all crops related to the business. This is often referred to as “all or none”.

Deferral is not allowed for proceeds resulting from revenue related claims.

Farm Property Insurance

Proceeds from the loss of business property is not taxable income, given that you use the proceeds to replace the damaged property. In order to qualify, you must replace the property within 2 years from the year of the loss and the replacement property must be similar or related in service. If you are unable to replace the property, then any proceeds received would be considered income and may result in a taxable gain or loss. The gain or loss would be the difference between your remaining basis in the asset and any unused
proceeds.

If you are able to find replacement property, you must remember to exclude any insurance proceeds from the tax basis or deductible expenses. For example, if your grain bin gets damaged in a storm and your insurer gives you $10,000 for damages but total repairs comes out to $15,000. Then you can only add $5,000 to the tax basis of the grain bin.

This is the just the tip of the iceberg when dealing with insurance proceeds. If you have any further questions or comments, please do not hesitate to reach out!

 

Kyle Meyer, CPA

Central Iowa Farm Business Association

316 Stevens Street, Iowa Falls, IA 50126

Phone: 641-648-4380