Tax Considerations for Crop Insurance Indemnities

Many parts of the Northeast have faced a challenging planting season with wet weather and cool temperatures; now as summer kicks off, many are seeing significant stretches of above average temperatures. Given these recent extremes in weather conditions, a review of the tax implications of various crop insurance programs is warranted.

We previously shared a primer on deferral options for crop insurance indemnities that details some of the specifics about making the election. It is helpful to recall the prerequisites laid out in the previous article to make a deferral election before diving deeper into the practical application of this strategy.

A farm taxpayer can elect to defer the recognition of crop insurance indemnities received in the current year to the following year if:

1. They use the cash method of accounting for tax purposes,
2. They receive crop insurance or disaster payments for crop damage or destruction in the same year as the damage/destruction, and
3. Establish that under normal business practices, the income from the damage/destroyed crops would have been included in gross income in any tax year following the year of destruction or damage.

With these criteria in mind, let’s examine a few examples to illustrate when and how the deferral election may be available.

Example 1: Farmer John received $18,500 in 2025 for prevented planting crop insurance coverage on his corn crop. The payment was because John was unable to access portions of his field due to the wet weather, so the crop was simply not planted rather than destroyed or damaged.

Internal Revenue Code section 451(f) defines the deferral election as applying to insurance proceeds received as a result of damage or destruction to crops as well as disaster payments received from the federal government under the Agricultural Act of 1949 and the Disaster Assistance Act of 1988. The election was expanded under the Treasury Regulation 1.451-6(a) to apply to all federal payments received as the result of destruction or damage to crops caused by drought, flood or any other natural disaster, or the inability to plant crops because of such a natural disaster. Thus, prevented plant payments would be eligible for deferral. It is important to ensure that the rest of the deferral criteria are met. If John’s corn crop is typically used exclusively for corn silage to feed his dairy herd, rather than grain corn harvested and sold, he would not be eligible to defer the prevented plant payment because he cannot establish the business practice of selling in a subsequent tax year.

Example 2: Farmer Sally plants similar acres of corn and soybeans to harvest and sell as grain from her sole proprietorship. In 2025, Sally received $14,000 for prevented planting on her soybean crop, and later $11,000 in disaster assistance payments for damage to her corn crop; both were reported as crop insurance proceeds. In previous years, Sally sells 40% of her corn crop the year after harvest and 65% of her soybean crop in the year after harvest.

Sally may wonder if she could elect to report the $11,000 of corn disaster payments in 2025 but defer the $14,000 of prevented plant to 2026. This would not be possible because both crops are part of a single trade or business, so she must elect deferral for both crops or for neither crop. Though the payments came from different federal programs, both are treated as crop insurance and must be treated as one payment.

Should Sally decide she wants to defer the entire $25,000 of payments, it would be important to consider if she was eligible to do so based on typically having sales of the crop spanning the current and subsequent tax year. Because Sally has an established practice of selling more than 50% of her crop in aggregate in the tax year following harvest, she likely could elect to defer all the insurance and disaster proceeds for both crops to 2026. (Note that taxpayers in the Eighth Circuit may need to meet the more than 50% test for each crop to be eligible for deferral).

Example 3: Farmer Joe has a Pasture, Rangeland and Forage policy that paid out $8,000 in 2025. The payment was based upon precipitation levels determined by a rainfall index.

The IRS has addressed this issue in a recent update to Publication 225 (The Farmers Tax Guide) noting that proceeds received from weather insurance policies cannot be deferred if the payment is based on rainfall amounts and is not a result of physical damage to a crop.

As you can see, there are many factors beyond the crop insurance indemnities reported on a business’ profit and loss statement that will be relevant to considering all available tax strategies. Coordination between the farmer, their tax advisor, and insurance agent may be prudent to achieve the best possible outcome.

While the ability to defer crop insurance payments received in 2025 may exist, it is an option that should be considered as part of a larger plan. Current year income, options for income averaging, and expected future revenues and spending plans all considered together will inform the decision to be made.