Tax Relief for Farmers and Agriculture in Disaster Situations

If you or your farm are in a region declared to be a disaster area by the federal government, you may benefit from certain tax law provisions. These can include extensions of tax filing and payment deadlines.

Many special tax law provisions may help taxpayers and businesses recover financially from the effects of a natural disaster. These include extensions of deadlines to file and pay taxes, the casualty loss tax deduction, and disaster assistance loans from the Small Business Administration. It is important to discuss these options with a tax professional. Farmers who live in disaster areas can also benefit from preventative measures to reduce damage to crops and livestock. These strategies are often cheaper and more effective than post-disaster relief efforts, such as rehabilitation, reconstruction, and recovery. Farmers who invest in prevention practices can reap long-term benefits and deliver economic returns to their communities.

Agricultural Risk Protection Act

The Agricultural Risk Protection Act covers crop losses due to a presidentially-declared disaster. The program provides a safety net to farmers who face a wide range of natural hazards, including droughts, floods, hurricanes, tornadoes, wildfires and severe winter weather. The Agricultural Risk Protection Act is an excellent way for farmers to protect themselves against disaster-related losses. However, there are some limitations to this program. For example, a farmer can only defer insurance payments for crops that have been destroyed or damaged by the disaster. This excludes any losses from revenue protection policies that provide coverage for both revenue and crop-loss damages.

Tax Relief for Farmers and Agriculture in Disaster Situations
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Crop Insurance and Disaster Program Payments

As the 2024 crop insurance and disaster program payments begin to roll in, farmers need to be prepared for them to be taxed as income. However, a little-known law allows producers to elect to defer recognition of all or a portion of these payments until the following year. This presents a great planning opportunity for farmers that the Farm Credit East tax team can help navigate.

The deferral election must be made for every crop in each year that the farmer receives insurance or disaster payments, and only if those payments are for losses attributable to crop destruction or damage. This prevents farmers from recognizing too much income in one year and then bunching the following years’ taxes to avoid a higher tax bracket, as is common with farm income.

In addition to the deferral election, there is a special deduction for damages caused by natural disasters. This can include losses to livestock and crops, including damage to stored grain. This deduction is available only if your property is located in a presidentially-declared disaster area. The deduction is claimed on the taxpayer’s previous or current year tax return by filing a Form 1040-X, Amended U.S. Individual Income Tax Return. Another option is for a producer to use the two-year rule, which does not require a federal disaster area designation.

Tax Relief for Farmers and Agriculture in Disaster Situations
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Farmer Deferral Programs

Farmers must show that they would have recognized more than 50 percent of the crop in the year following harvest under their regular business practices to defer payments. This can be established through the use of sales histories and affirmations. However, IRS Publication 225 states that deferral isn’t allowed for proceeds from revenue insurance policies. This seems to contradict the Eighth Circuit court’s interpretation in Nelson.

If you have an agribusiness in an area declared a disaster by the President, you may be eligible for special tax relief. You can apply for a special deduction by submitting documentation of expenses related to the disaster. The maximum deduction is $2,500. In addition, the tax law provides additional credits for beginning farmers, who must complete a farm management program within ten years of starting their agricultural operations. This is a nonrefundable credit.

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