Author: Ryan Loy

With tax season in full swing, knowing how to properly report crop insurance premiums and indemnities is important to ensure accurate tax reporting. Many producers have CPAs or accounting firms that manage their finances and taxes. However, understanding how to report crop insurance proceeds is a great on-farm skill when maintaining accurate financial records.

The Schedule F, “Profit and Loss from Farming,” is an Internal Revenue Service (IRS) form that allows producers to report net profit (or losses) from their agricultural production (IRS, 2022). The Schedule F shows income and expenses pertaining to principal farming activities, such as grain and livestock sold, any income from cooperatives, program payments, and federal crop insurance distributions. Crop insurance proceeds (or indemnities) must be included on a Schedule F as farm income regardless of how much proceeds a producer receives to cover the producer premium. Importantly, crop insurance proceeds can be reported in several ways depending on when you sell your grain. 

1. Reporting crop insurance indemnities – not deferred

Assume a producer received $50,000 in crop insurance indemnities this year and would receive a 1099-MISC form from the crop insurance company confirming that indemnity amount. The producer’s normal business practice is to sell their crop in the same year as production (i.e., crops produced in 2023 are sold in 2023). Therefore, the producer must report the indemnity on the tax return for the year the crop was sold and produced. The $50,000 indemnity would be reported on lines 6a and 6b.  

Figure 1. Reporting a $50,000 Crop Insurance Indemnity

2. Reporting crop insurance indemnities – deferred

Again, assume a producer received $50,000 in crop insurance indemnities this year. However, the producer normally reports income from crops in a following tax year under their normal business practices. Therefore, the producer can defer the crop insurance indemnities to next year. The $50,000 would again be reported on line 6a. But now, the producer checks the box on line 6c to defer the indemnity until next year (Figure 2). To defer, a producer must submit a statement containing 1) producer’s name and address, 2) declaration that the producer is making the deferral, 3) identifying crop and damage information, 4) declaration that crop income is normally included in the following year, and 5) name of the insurance carrier. For more information on how to compile this statement, please consult a tax professional.

Now, let’s assume the producer deferred a $30,000 indemnity in 2022 and must report it on their 2023 taxes (Figure 3). The producer would follow Figure 2 and then report the $30,000 on line 6d. 

Figure 2. Deferring a $50,000 Crop Insurance Indemnity

Figure 3. Reporting a Deferred Crop Insurance Indemnity from 2022

3. Reporting crop insurance premiums

Lastly, the premium paid is reported as expense on the Schedule F. The full amount of premium paid must be reported regardless of how much indemnities cover the premium cost. In this case, premiums reduce Schedule F profit and lessens the tax burden on their farming enterprise. Assume a producer paid a total of $40,000 in premiums for 2023, they would report this amount on Schedule F, Part II, line 20, effectively reducing taxable Schedule F profit by $40,000. 

Figure 4. Reporting a $40,000 Crop Insurance Premium

It’s worth noting that we are not tax accountants, and every farm’s situation is unique. Therefore, you should always consult with a tax professional when preparing your farm’s taxes. 

References

Internal Revenue Service. (2023, July 13). About Schedule F (Form 1040), Profit or Loss From Farming. Retrieved September 25, 2023, from https://www.irs.gov/forms-pubs/about-schedule-f-form-1040.

Loy, R. and Biram, H.D. (2023). Cultivating Financial Security: A Guide on Farm Finances, Taxes, and Crop Insurance. University of Arkansas System Division of Agriculture, Cooperative Extension Service Fact Sheet No. FSA80.

Tidgen, K.A. (2019). Special Rule for Taxing Crop Insurance and Disaster Payments. Iowa State University Center for Agricultural Law and Taxation. Retrieved September 25, 2023, from https://www.calt.iastate.edu/blogpost/special-rule-taxing-crop-insurance-and-disaster-payments.

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Loy, Ryan, and Hunter Biram. “Tax Reporting for Crop Insurance.” Southern Ag Today 4(11.3). March 13, 2024. Permalink

Every year, the Farm Service Agency (FSA) national office reviews the Soil Rental Rates used for the Conservation Reserve Program (CRP). The FSA has recently announced that county-average rental rates will be updated based on the 2023 National Agricultural Statistics Service (NASS) Cash Rent Survey results for dryland rent estimates. When considering the prevalent farm lease arrangements and production practices, NASS survey results may not provide accurate estimates. This results in a county-average rental rate that does not reflect typical rent paid in a county. For example, Figure 1 highlights the percentage change in proposed CRP rental rates in Arkansas between 2023 and 2024, where negative values represent counties facing lower CRP rental rates than in 2023. 

Figure 1. Percentage Change in Stated CRP Rental Rates This figure provides the year-over-year percentage change in stated CRP rental rates in Arkansas between 2024 and 2023. (Source: USDA-FSA, 2023)

Several acceptable models can be used to address rental discrepancies or determine an alternative rate. One such method approved by the FSA is the “Share Rent Equivalent Model.” The model intends to infer cash rents in situations (e.g., counties) where share leases predominate available data or where share leasing is the rule rather than the exception. Acceptable supporting data sources for the model include an average of the most recent three years of yield data, including NASS county yields. When NASS yields are unavailable, RMA T-yields can be substituted. 

Arkansas counties are an example, though this model applies to any county in the southeast region of the United States. Given the prevalence of 20% and 25% share leases found in the southeast region and the limited amount of non-irrigated crop production, the model incorporates county-specific production practices and lease structures that more accurately reflect the soil value and environmental benefits of the CRP program. Table 1 utilizes the “Share Rent Equivalent Model” to determine an alternative cash rent for 20% and 25% share leases under a wheat/soybean double cropping system for Arkansas County, Arkansas.  

Table 1. Share Rent Equivalent Model for Wheat/Soybean Production, Arkansas County

Crop	Winter Wheat	Non-Irrigated Soybeans	Winter Wheat	Non-Irrigated Soybeans
Share Rent (%)	25%	25%	20%	20%
RMA T-Yield (bu/ac) (2020-2022 avg.)	63	41	63	41
RMA 2023 Harvest Price	$6.60	$12.84	$6.60	$12.84
Cash Rent Equivalent ($/acre)	$103.95	$131.61	$83.16	$105.29
Total Cash Rent Equivalent ($/acre)	$235.56		$188.45

The results in Table 1 more closely resemble non-irrigated cash rents in the representative county, particularly in the current commodity market environment for grains. Figure 2 is a map of alternative CRP rental rates derived from the “Share Rent Equivalent Model” for 20% crop-share arrangements in predominate agricultural counties in Arkansas. Furthermore, the model’s accuracy is determined by calculating the percentage change between the 2023 effective CRP rental rate and the alternative 2024 CRP rates from the model. Figure 3 maps this percentage change for each county in Arkansas. According to Figure 3, our estimates are only marginally higher than what was stated in 2023. Therefore, we can conclude that the “Share Rent Equivalent Model” reflects existing CRP rental rates more accurately than the survey-based approach. Work with your local FSA office to determine if the Share Rent Equivalent model more accurately reflects cash rent in your county.  

Figure 2. Share Rent Equivalent CRP Rental Rates at 20% Crop Share (2024) This figure provides the per acre share rent equivalent CRP rental rates under a 20% crop share. (Source: USDA-FSA, 2023)

Figure 3. Percentage Difference in the Share Rent Equivalent at 20% and Stated CRP Rental Rate This figure shows the percentage difference in the 2024 share rent equivalent and the 2023 stated CRP rental rate. (Source: USDA-FSA, 2023)

References

USDA-FSA. (2024, January). 2023 ARC-County Benchmark Yields and Revenues as of January 5, 2024. Retrieved January 31, 2024, from https://www.fsa.usda.gov/programs-and-services/arcplc_program/arcplc-program-data/index.

USDA-FSA. (2022, October). 2022 ARC-County Benchmark Yields and Revenues as of October 31, 2023. Retrieved December 20, 2023, from https://www.fsa.usda.gov/programs-and-services/arcplc_program/arcplc-program-data/index.

USDA-FSA. (2023, December). Provisional County-Average Rental Rates to Determine CRP SRR’s for FY 2024. Retrieved January 30, 2024, from https://www.fsa.usda.gov/Internet/FSA_Notice/crp_1012.pdf.

USDA-NASS. (2022, August). Arkansas Cash Rents County Estimates. Retrieved December 20, 2023, from https://www.nass.usda.gov/Statistics_by_State/Arkansas/Publications/County_Estimates/2021-2022/22_AR_cash.pdf.

USDA-RMA. (2023). USDA-RMA Actuarial Data Master.

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Loy, Ryan, and Hunter Biram. “Using the Share Rent Equivalent Model to Determine Farmland Value.” Southern Ag Today 4(9.3). February 28, 2024. Permalink

Using crop insurance to guarantee debt obligation coverage is one of many ways insurance can be used as a risk management tool. Additionally, adequate crop insurance will often be a lender requirement on operating loans. Operating loans are typically revolving lines of credit that assist in covering pre-harvest expenses (e.g., seed cost, fertilizer, fuel, etc.). Table 1 below contains example revenue and pre-harvest expenses that might be incurred by a soybean and cotton producer in the southern region. Assume an example soybean producer in Crittenden County, Arkansas and a cotton producer in Lubbock County, Texas, where the farm-level soybean and cotton Actual Production History (APH) yields are equal to the state average of 50 bushels per acre and 1,196 pounds per acre, respectively. Furthermore, we assume the Projected Price for the 2024 growing season to be $12.60 per bushel for soybeans and $0.87 per pound for cotton. 

Table 1. Simplified Sample Budget for a Southern Soybean and Cotton Producer

Revenue			Soybean	Cotton
	APH Yield	Per Acre	50	1,196
	Projected Price (USDA-RMA)		$12.60/bu	$0.87/lb
	Expected Revenue (446 Acres)		$280,980.00	$464,072.00
Pre-Harvest Expenses
	Expected Pre-Harvest Expenses (446 Acres)		$144,058.00	$247,084.00

Consider a producer who finances an operating loan to cover their pre-harvest expenses (e.g., $145,000 based on a 446-acre soybean operation). Additionally, they elect to use Revenue Protection (RP) crop insurance to guarantee a level of revenue. For example, at a coverage level of 50%, a soybean producer would be guaranteed $140,490 based on an expected revenue of $280,980 ($280,980 * 0.50 = $140,490). The question becomes, at what level will the RP guarantee cover the entire operating loan obligation in the case of a complete loss? Additionally, we consider a producer taking Catastrophic Risk Protection Endorsement (CAT) coverage that triggers in the event of a yield loss of 50% or more. CAT coverage provides producers with low-cost coverage on 50% of APH yield and 55% of the RMA projected price (Biram and Coble, 2023). We assume total yield loss (e.g., 0 bushels per acre). Tables 2 and 3 below highlight realized returns to a soybean and cotton producer net of their operating loan obligation. Returns are compared over an interest rate range of 5% to 10% (.5% increments), and RP elected coverage levels from 50% to 65% (5% increments).

Table 2. Returns Above $145,000 Operating Loan (Soybean)

Table 3. Returns Above $250,000 Operating Loan (Cotton)

If the dollar value within Tables 2 and 3 is positive, then operating loan debt is covered with additional funds to pay other obligations. If the amount is negative, a producer would be unable to re-pay their entire operating loan only using RP or CAT indemnities. It’s important to note that pre-harvest expenses are only an estimate. We assume an annual interest rate with the producer paying the operating loan in one lump-sum at the end of harvest; that is, if the annual interest rate is 5% and payment is made at the end of harvest (assuming 9 months) with an operating loan of $145,000, the final payment will be $150,529 (principal plus $5,529 accrued interest).  

Crop type plays an important role in this decision since positive cash flow is heavily dependent on coverage levels and operating loan interest rates for a specific crop. Also, under no circumstance does CAT coverage ensure either producer can cover their operating loan debt at the representative loan, farm size, and crop type. Tables 2 and 3 show that operating debt coverage based on a 50% RP coverage level will be negative regardless of crop type. Increasing coverage to 60% would mean a soybean producer could guarantee covering their operating loan, while a cotton producer needs at least 65% coverage to guarantee operating debt repayment in the event of a catastrophic loss.  

References

Biram, H.D. & Coble, K. H. (2023). A Brief History of Crop Insurance. University of Arkansas System Division of Agriculture, Cooperative Extension Service Fact Sheet No. FSA70. (Link)

USDA-NASS. (2023, February). Farms and Land in Farms 2022 Summary. Retrieved October 12, 2023, from https://downloads.usda.library.cornell.edu/usda-esmis/files/5712m6524/bk129p580/2z10z2698/fnlo0223.pdf.

USDA-NASS. (2023, January 12). Arkansas Crop Production. Retrieved October 12, 2023, from https://www.nass.usda.gov/Statistics_by_State/Arkansas/Publications/Crop_Releases/Annual_Summary/2022/arannsum22.pdf.

USDA-RMA. (2023, October 1). RMA Price Discovery. Retrieved October 12, 2023, from https://prodwebnlb.rma.usda.gov/apps/PriceDiscovery/Reports/CurrentPeriods.

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Loy, Ryan, and Hunter Biram. “Crop Insurance as a Safety Net for Operating Loan Obligations.“ Southern Ag Today 3(43.3). October 25, 2023. Permalink