Tax Preparer Continuing Education Needed to Address Special Rules For Agricultural Income
When completing tax returns for individuals with agricultural activities, various income sources are reported. In addition to sales of crops or animals raised, farm operations occasionally collect proceeds from crop insurance. The general rules that apply to crop insurance are important subjects for tax preparer continuing education of professionals working with farmers.
Income tax is deferrable on payments from crop insurance policies under certain conditions. The insurance must cover crop damage and not represent the type of coverage protecting against commodity price reductions. Correct procedure in a registered tax return preparer job for these situations allows deferred reporting of insurance money for one year when the farmer normally sells more than half his crop in the year following harvest. However, farmers who usually sell more than half their crop in the harvesting year cannot defer insurance proceeds.
In addition, the year of payment for crop insurance is critical. When a policy benefit is received in the year after crop damage, the income is reported in the year received. A one-year deferral of payment has already occurred following the damaging event. When a farmer elects to defer reporting crop insurance funds, tax preparer work must apply the deferral to all such proceeds. Farmers are not permitted to defer only some insurance payments for a particular crop.
Accurate tax preparer course information on farm income often treats each crop as a separate business unit. This may cause different crops to receive distinctive tax treatments for a single farmer. Selling of more than half of a crop during the harvesting year may apply to some commodities and not others. Consequently, insurance proceeds may qualify for tax deferral on one crop while other crops are ineligible for the same action.
When tax preparers encounter farmers with separate business units, RTRP worksheets help differentiate the allocation of crop insurance. This often arises with instances of family farming operations. That is, a farmer may have a proprietorship for raising a crop on his own land while having a partnership with a relative on adjacent land they inherited together. He can choose to report as taxable income the crop insurance proceeds for the solo enterprise even if the partnership elects to defer tax on its insurance payments.
Individual cases in RTRP study may reveal a farmer accounting for an agricultural operation as a single enterprise. For example, a farmer could report a grain business that aggregates wheat, corn, soybeans, and cattle. In these instances, the total sales of all crops are considered when determining if half are sold in the harvesting year. When more than half of all crop sales in a combined reporting system occurs after the harvesting year, tax deferral is applied to either all or none of the insurance proceeds.
IRS Circular 230 Disclosure
Pursuant to the requirements of the Internal Revenue Service Circular 230, we inform you that, to the extent any advice relating to a Federal tax issue is contained in this communication, including in any attachments, it was not written or intended to be used, and cannot be used, for the purpose of (a) avoiding any tax related penalties that may be imposed on you or any other person under the Internal Revenue Code, or (b) promoting, marketing or recommending to another person any transaction or matter addressed in this communication.