AgDM newsletter article, December 1998

Reporting government payments for tax purposes *

Neil HarlBy Neil Harl, Charles F. Curtiss Distinguished Professor in Agriculture and Professor of Economics, 515/294-6354, harl@iastate.edu

The slide in crop prices (and farm income) in 1998 in many areas of the country has activated two provisions in the 1996 farm bill which are likely to be involved in reporting 1998 farm income.  These provisions are non-recourse marketing assistance loans and loan deficiency payments.  These two provisions need to be applied in light of other provisions in existing tax law.

Loan deficiency payments

A loan deficiency payment (LDP) is a payment for the difference between the county loan rate for the commodity and the CCC-determined price (the posted county price).  If a commodity is eligible for a Commodity Credit Corporation (CCC) loan, the commodity is eligible for an LDP.  However, once a commodity is used for an LDP it is not eligible to be placed under CCC loan.

The LDP must be requested before the producer loses the "beneficial interest" in the crop and, therefore, an LDP cannot be requested once the crop has been sold.  An LDP can be claimed for farm-stored or warehouse-stored commodities.  An LDP can be requested on all or a portion of an eligible crop.

The LDP amount appears to be taxable in the year received and is apparently not deferrable as a federal disaster payment.

Marketing assistance loans

A marketing assistance loan (or marketing loan) gives the borrower (operator or eligible landowner) an additional repayment option of repaying the lesser of principal plus interest on the loan or the county posted price for the commodity under the CCC loan.  For "contract" commodities, any production on a farm containing eligible cropland covered by a production flexibility contract is eligible for a marketing loan.  For oilseeds, any production is eligible for the marketing loan.

The statute specifically states that a producer must, as a condition of receiving a marketing assistance loan, comply with all conservation and wetlands protection requirements during the term of the loan. 

The income tax treatment of a marketing loan depends on whether the taxpayer treats CCC loans as loans or has elected at some point to treat CCC loans as income. 

 Example:  Corn is placed under CCC loan ($30,000) in October of 1998.  In 1999, the commodity is redeemed and the loan is paid off for $27,000 based on the posted county price at that time.  The corn is sold later in 1999 for $32,000.

With the election to treat CCC loans as income:

Gain in 1998

$30,000

Gain in 1999:

Gain in repaying loan

$3,0001

Gain on sale of corn

2,000

5,000

5,000

Total gain

$35,000

With the CCC loan treated as a loan:

Gain in 1998

-0-

Gain in repaying loan

$3,000

Gain on sale of corn

32,000

$35,000

35,000

Total gain

$35,000

It is important to check the figures closely on information returns filed with the Internal Revenue Service.  That filing does not necessarily reflect the CCC loan election and may put part of the gain in the wrong year.

Crop insurance and disaster payments 

Crop insurance and disaster payments are normally reported as income in the year of receipt.  However, operators and share-rent landlords on the cash method of accounting may elect to defer crop insurance proceeds and federal disaster payments to the following year if the taxpayer has a history of deferring a substantial amount of the crop in prior years (generally interpreted as more than 50 percent of the crop).  It is not possible to defer only a portion of crop insurance or disaster payments.

Both crop insurance and disaster payments must be treated the same way if received in the same taxable year.  Neither need be deferred, even though the taxpayer is eligible, and both can be deferred if the taxpayer elects.  But it is not possible to defer one and not the other if received in the same taxable year.  Of course, if received in different taxable years, the payments can be treated differently.

One election covers the insurance proceeds attributable to all crops representing a trade or business.  An election counts only for the tax year in which made; application to revoke an election must be made to the District Director of Internal Revenue. 

A major concern is whether the newer "revenue insurance" crop insurance contracts meet the tests for deferral.  IRS, in the past, has insisted that the crop insurance recovery relate to the condition of the crop in order to be deferrable as crop insurance.  Legislation has been introduced (but not yet passed) to extend the deferral opportunity to revenue insurance contracts.

Neither LDP payments nor marketing assistance loan repayment "profits" appear to be eligible for the one-year deferral.  The statute refers to "…insurance proceeds received as a result of destruction or damage to crops" or federal disaster payments.

In conclusion

Year-end tax planning for 1998 will be particularly important and will involve the application of some tax concepts that have not been in general use in many parts of the country.

* Reprinted with permission from the October 14, 1998 issue of Agricultural Law Digest, agricultural law press publication.  Footnotes not included.

1Some authority exists to reduce the basis in the crop by the marketing loan gain rather than to report the marketing loan gain separately where CCC loans are treated as income as to the part of the commodity represented by the loan. This could make a difference in when the marketing loan gain is reported into income if the loan is redeemed in a year before the crop is sold.

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