Income Tax Problems in 2020?

Contributed by Charles BrownExtension Farm Management Field Specialist, crbrown@iastate.edu

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Market Facilitation Payments (MFP), Coronavirus Food Assistance Program (CFAP 1 & CFAP 2), Paycheck Protection Program (PPP), Syngenta payments, ARC/PLC payments, crop insurance, etc. have pumped close to $40 billion into the US farm economy in 2020. If you are thinking of deferring any of these government payments, only crop insurance may offer the possibility of deferral. In February of 2020, the USDA was predicting a reduction in US farm income, but now is predicting growth in farm income, up to $115 billion.

This increase in government income could cause some unexpected tax consequences for some farmers this year. Even though crop and livestock prices were low for much of the year, they have now improved and coupled with government payments, farm income is looking better than expected.

If you happen to be in the group that is having a good year and may be better than expected, what can you do to manage your income and income taxes? Here are a few tips that you may use to manage your income.

Prepay expenses: This only works for cash basis taxpayers, not accrual. Some examples that you may prepay are seed, fertilizer, chemicals, feed, up to 12 months land rent that is coming due and any accrued business interest. You must have a business reason for doing so, such as to lock in a price or to insure supply. Tax avoidance is not a good business reason.

Defer income: Using deferred payment contracts for grain sales gives you a lot of flexibility. If you like the price today, you can lock the price in, but take the payment in 2021. The added flexibility is that if you are a cash basis taxpayer and find that you needed the income in 2020, you can pull the contract back into 2020 from 2021 and report the income in 2020, even though you will not receive the cash until 2021. There is a catch, you must pull back a full contract, you cannot pull back a portion of a contract. To have added flexibility you should have multiple smaller contracts and not just one large one. This allows you to have a better chance at managing your income to a level that you want. The added bonus is that this decision can be made after the end of the year.

Crop insurance also may be deferred if the payment received is due to crop damage and not price loss and you normally would have sold the majority of the crop the following year. Again, this does not work for accrual taxpayers.

Depreciation: There are several options for determining how much depreciation you want to take on new asset purchases. If you want to use accelerated methods you have available Section 179 and bonus depreciation. For 2020, the maximum Section 179 is $1,040,000. Farm machinery, grain bins, solar grids, breeding livestock, confinement buildings and field tile all qualify for Section 179. They have to be used more than 50% in the business of farming and it is an asset-by-asset decision. Section 179 cannot create a net operating loss. If you take more than allowed, the remainder will carry over to the following year. The good news is that unlike in previous years, Iowa now couples with the federal rules.

Bonus depreciation is another accelerated method of depreciation. Unlike Section 179 where you choose how many dollars you expense, with bonus depreciation, it is all or none. You expense either the full purchase price or none of it. It can be used on new or used assets and can be used on 20-year property, such as machine sheds. Bonus depreciation is a class-by-class decision. New machinery is a class life 5, so if you decide to use bonus depreciation on a new machinery purchase, all new machinery you purchased will have to use bonus depreciation. Bonus depreciation can create a net operating loss, unlike Section 179. Iowa did not couple with the federal rules on bonus depreciation, so you may reduce federal income, but not Iowa income.

Bonus depreciation also can be used by land owners receiving cash rent.

Retirement plans: Funding retirement plans will reduce federal income taxes, but not self-employment tax. Some retirement plans to consider may be traditional IRAs, 401Ks, Simplified Employee Pension Plan (SEP), Solo 401K, etc.

Charitable giving: The standard deduction for married filing jointly is $24,800 in 2020. You have to exceed this amount with your itemized deductions before it pays you to itemize. Gifting to charities is one of the itemized deductions, but many farmers do not exceed the standard deduction so their charitable giving does not create a tax deduction. Gifting grain to your favorite charity is a much better option. If you sold the grain and then gifted money to your charity, you would have to pay federal, state and self-employment taxes on the income. When you gift the grain directly to the charity, you do not get a charitable deduction, but also have no income to report and avoid the tax consequences. Ownership of the grain must be transferred to the charity before it is sold. Someone from the charity then makes the arrangement to sell the grain.

College savings plans: Contributing to 529 plans can save Iowa income taxes, but not federal taxes. A single person can contribute $3,439 per beneficiary in 2020. A husband and wife could contribute twice that amount. When the money is withdrawn and used for eligible education expenses, it is not taxed.

These are just some of the ways you can manage taxable income, but everyone’s situation is different. It is advisable to contact your personal tax preparer to determine what is best for your tax situation.

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November USDA WASDE Summary

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Chad Hart, ISU Extension Grain Marketing Economist, provides a summary of the latest WASDE report.

Compared to trade expectations, USDA lowered corn and soybean yield and production estimates and raised corn exports by more than expected. The slide in yields was across a broad swath of the country, reflecting the longer-term impacts of the drought and the extremely dry crops were brought in (yield loss due to crop moisture being below to well below average). Corn dropped 2.6 bushels per acre, knocking 215 million bushels out of total production. Soybeans dropped 1.2 bushels per acre, taking 98 million bushels out. For soybeans, the yield drop dominated the other small tweaks and the lack of adjustments to crush and exports. With the new soy stocks to use ratio now below 5%, the report provided another upward leg for the soybean market. USDA raised its 2020/21 season average to $10.40, the futures market was already at $10.60 and added roughly 30 cents today.

For corn, the yield drop was only part of the story. USDA also projected exports to rise to 2.65 billion bushels, a record. The export rise can be chalked up to a near doubling of expected corn sales to China. Most of those Chinese sales have already been made (roughly 85%), but only 15% of the targeted exports to China have been delivered at this point. 2020/21 ending stocks were lowered to 1.7 billion bushels (lowest level since 2013/14) and the USDA season-average price estimate rose to $4 per bushel. The futures market was at roughly $3.70 before the report, so for corn, USDA is already projecting continued price strengthening.

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September’s USDA WASDE Summary

Chad Hart image

Chad Hart, ISU Extension Grain Marketing Economist, provides a summary of the latest WASDE report.

For corn, national yield was set back to 178.5 bushels per acre, down 3.3 bushels per acre and even with USDA’s earlier trend. With the downward adjustment in harvested area, that subtracts 378 million bushels from production, lowering total production to 14.9 billion bushels. Iowa was estimated at 191 bu/ac (down 11 bu/ac). Illinois was set at 203 bu/ac, down 4 bu/ac. Minnesota was set at 200 bu/ac, up 3 bu/ac. Indiana was set at 186 bu/ac, down 2 bu/ac. On the demand side, exports were lowered 30 million bushels on old crop, but raised 100 million bushels on new crop. Feed and residual was lowered 100 million bushels as well, but the change here is more related to the thought that smaller crop, smaller losses than reduced feed consumption. And ethanol was lowered 5 million bushels for old crop and 100 million bushels for new crop, on the continued drag in fuel usage. The result is 2020/21 ending stocks declined by 253 million and the 2020/21 season-average price estimate rose 40 cents, to $3.50 per bushel.

For soybeans, national yield was set at 51.9 bu/ac, down 1.4 bu/ac from last month. That subtracts 112 million bushels from production, lowering total production to 4.313 billion bushels. Iowa was estimated at 54 bu/ac, down 4 bu/ac. Illinois was set at 62 bu/ac, down 2 bu/ac. Minnesota was set at 52 bu/ac, up 1 bu/ac. Indiana was set at 60 bu/ac, down 1 bu/ac. On the demand side, no adjustments to new crop. Old crop crush was raised 10 million and old crop exports were raised 30 million. Like with corn, soybean 2020/21 ending stocks fell by 150 million bushels and the 2020/21 season-average price estimate rose 90 cents, to $9.25 per bushel.

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Practical Guidelines to File Crop Insurance Losses Due to the Derecho

Alejandro Plastina

Written by Alejandro Plastina, Extension Economist, plastina@iastate.edu

Printable PDF Version

Overview of the Crop Insurance Claim Process

Wind is a covered event in Multi-Peril Crop Insurance and farmers whose insured crop acres have been affected by the Derecho may be eligible for indemnity payments.

Affected farmers should file a Notice of Loss (NOL) with their crop insurance agent within 72 hours of the initial time of discovery of damage or loss and follow up in writing within 15 days. When filing a timely NOL is not feasible, a delayed NOL may be accepted.

The NOL allows the Approved Insurance Provider (AIP) to contact the policyholder and make a determination in a case-by-case basis whether an indemnity will be paid. That decision will depend both on field conditions and farmer’s decisions:

A. If the AIP determines that field conditions will prevent farmers from ever being able to mechanically harvest the crop, that production will be considered a full loss.

B. Otherwise, the farmer can choose to:
1. Settle the case based on appraised production; or
2. Take the crop to harvest.

If a farmer chooses to harvest the crop (even if they chose option 1 in the first place), the producer must accept the highest of harvested production or appraised production for claims purposes. Farmers who choose option 1 first and then decide to harvest the crop must file a revised claim.

Practical Guidance for Farmers

Iowa corn field damaged by the August 10, 2020 derecho, photo by Meaghan Anderson, ISU Extension and Outreach field agronomist
  1. Contact your crop insurance agent as soon as possible, and file a NOL.
  1. If you want an immediate release of the field for another use, you can request the use of Representative Sample Areas or RSAs by the AIP. These are areas of a field that the AIP authorizes to leave untouched for later appraisal when an accurate appraisal cannot be made at the present time. Appraisals from the RSAs of the unharvested crop acreage are later used to settle the claim.
  1. You can salvage any remaining crop for use as silage, but your indemnity payment might be affected depending on how the crop is insured:
    a. For corn insured for Grain, once the AIP releases the field for another use, you can harvest for silage without penalty.
    b. For corn insured for Silage, if you agree to settle in appraised production, but you still attempt to harvest for silage, you must accept the higher of the appraised or the harvested production for claim purposes.
  1. You can hay or graze a second crop without penalty if the ground has been released for another use by the AIP, it is not practical to replant the insured crop, and the second crop will not be insured. This might be of interest to farmers who use cover crops.
  1. The only case in which you are required to physically destroy your crop production is when grain production is mature and no local buyers are willing to purchase it (typically due to molds and toxins in the mature grain), and it is not economical to ship it to other buyers. This is the case of a crop with Zero Market Value (ZMV), and destruction should take place whether the grain has been harvested or is still in the field.
  1. A Claims Advisory from the Risk Management Agency on August 21, 2020 indicated that the damaged crop in the released field for another use is not required to be harvested (even for RSAs appraisals).
  1. If you or someone you know are in need of assistance with stress and disaster management, call or visit online the Iowa Concern Hotline. Trained staff will assist you 24/7 and free of charge when you dial 1-800-447-1985 or go on-line.

Crop Insurance and Farm Finances

An estimated 87% of corn and 90% of soybean acres planted in 2020 are protected by crop insurance purchased by farmers in the spring. Crop insurance is an effective risk management tool, but is not designed to make farmers whole in the event of loss or damage to their crops. Just like with auto insurance, all policies have a deductible.

About 95% of those insured acres are under the Revenue Protection policy. The most comprehensive revenue protection policy has a 15% deductible that can easily amount to more than $100 per acre for corn and $55 per acre for soybean.

For a farmer planting 400 acres of corn and 200 acres of soybean affected by the storm, it means about $55,000 dollars in deductible that will not be available to pay for groceries, fuel, medical bills, principal and interest from existing loans, or inputs for the 2021 season. In many cases, since profit margins are currently so thin, even an 85% coverage level will not suffice to cover all production costs, particularly if the land is cash rented.

Finally, unless the AIP releases all acres in a unit, indemnity payments from crop insurance will not arrive until all crops are harvested and production records are submitted, late in the year. This will put additional strain on the working capital of Iowa farms, 28% of which started the season with vulnerable liquidity levels.

Additional Information

Disclaimer

The information provided is for reference purposes only and does not change the terms of the crop insurance policy. Talk to your crop insurance agent about specific questions related to your crop insurance coverage.

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Crop insurance coverage-frequently asked questions

Iowa map with images of farm management field specialists and their areas
ISU Extension and Outreach Farm Management Specialists provide expertise regarding crop insurance and adverse events.

Losses due to adverse weather conditions such as hail, frost, freeze, wind, drought, and excess moisture are insurable losses under multiple peril crop insurance.

In 2020, some Iowa farmers, especially in Western Iowa, are suffering the extremes of drought. Losses due to drought are an insurable loss under multiple peril crop insurance. Due to drought conditions, crop insurance claims are expected to be large for losses resulting from both corn and soybean yield declines in addition to a drop in the harvest prices used to calculate indemnity payments.

Another dynamic added to the mix is yield loss due to chemical drift, which is not a covered loss under multiple peril crop insurance.

Question: How many of Iowa’s corn and soybean acres are covered by crop insurance?

Iowa farmers planted 23.4 million acres of corn and soybeans in 2020. Approximately 90% of those acres have been insured using Revenue Protection (RP) multiple peril crop insurance. These insurance policies can guarantee various levels of a percentage of the farm’s average yield times the higher of the projected price (average futures price in the month of February) or the harvest price (average futures price during the month of October), using the November 2020 futures contract for soybeans and the December 2020 futures contract for corn. Most farm operators carry a guarantee of their APH from 65% to 85% level of coverage. The projected prices (futures average prices in February 2020) were $3.88/bu for corn and $9.17/bu for soybeans, respectively.

Hail damaged Iowa field
Hail damaged field, photo courtesy of Duane Johnson

Question: What should an insured farmer do once a crop loss is recognized?

  1. Notify the insurance agent within 72 hours of the discovery of damage, but not later than 15 days after the end of the insurance period. A notice of loss can be made by phone, in writing or in person. Although drought loss is not immediate, farmers should contact their agent as soon as they feel a loss is present.
  2. Continue to care for the crop using good farming practices and protect it from further damage, if possible.
  3. Get permission from the insurance company, also referred to as your Approved Insurance Provider (AIP), before destroying or putting any crop to an alternative use.

Question: Who will appraise the crops and assess the loss?

The crop insurance company will assign a crop insurance adjuster to appraise the crop and assess the loss. The insured farmer must maintain the crop until the appraisal is complete. If the company cannot make an accurate appraisal, or the farmer disagrees with the appraisal, the company can have the farmer leave representative sample areas.
These representative sample areas of the crop are to be maintained – including normal spraying if economically justified – until the company conducts a final inspection. Failure to maintain the representative sample areas could result in a determination that the cause of loss is not covered. Therefore, no claims payment to the producer.

Once appraised the crop can be released by the company to be:

  1. Destroyed – through tillage, shredding, or chemical means; or
  2. Used as silage or feed.

Question: Once released, may I harvest my corn as silage for feed?

Check with your crop insurance company. In a county where corn can be insured as grain only, the corn will be released, or harvested as silage or sold as feed. Any grain will be counted as production for your claim. In a county where corn can be insured as silage, the harvested silage will be counted as production.

Question: What is the difference among insurance units?

Many farmers have chosen to insure their crops using enterprise units in order to pay less expensive insurance premiums. Under enterprise units, losses are calculated by crop by county. Therefore all the corn planted by a farmer in a given county would be added together to determine a loss. If a farmer has chosen optional units, then losses are calculated by crop by field unit. Premiums are typically higher if choosing optional units but a good yield on one field does not cancel out the loss on another field.

Question: When will farmers be receiving indemnity payments for their crop insurance losses?

Adjusters will be busy with the increase in losses in areas that have been impacted. As soon as you are finished harvesting notify your insurance agent and an adjuster will be assigned to you. Insurance companies cannot defer payments to the next tax year, but claims adjusted late in the year may not be paid out until the following year.

Question: What is the maximum price that the harvest time indemnity price (average October futures price) can reach?

The maximum harvest indemnity price values for 2020 are twice of the projected price; or $7.76/bushel for corn and $18.34/bushel for soybeans, respectively.

Question: Can indemnity payments be deferred for income tax purposes until 2021?

A taxpayer using the cash method of accounting claims the income in the year they receive the payment. The insurance company will send the insured a 1099 showing the amount and tax year to report the income.

A farmer, if they are using the cash method of accounting for reporting taxes, can elect to defer crop insurance payments if the loss is due to yield loss and they normally sell more than 50% of their crop the year following harvest. They cannot defer any loss that is due to price loss. Farmers that are using the accrual method of accounting for reporting taxes cannot defer crop insurance payments.

Question: Will I be asked to provide proof of my bushels this year for crop insurance verification?

All multiple peril crop insurance users are subject to production verification on a random basis. If a claim that exceeds $200,000 is filed for an individual crop and policy, verification of production is automatically required by regulation. This also requires a 3-year audit.

Additional Resources

FAQ from USDA RMA regarding the August 10, 2020 Derecho

AgDM Crop Insurance Publications

ISU Extension and Outreach Crops Team
Storm Damage Resources
Drought Resources

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