Larry C. Jenkins Associate Professor Penn State INCOME TAX TREATMENT OF DISASTER PAYMENTS Farmers who uggmmmmmmm use the method of record-keeping ’ are generally ' required to re port income on their tax return in the year the income is received. An exception to that general rule may affect some Pennsylvania far mers in 1988. The exception applies to disaster payments received from the federal govern ment when crops cannot be planted, or when they are damaged or destroyed by a natural disaster such as drought or flood. Crop insurance proceeds are also cov ered by the exception. The exception to cash-method income reporting requirements allows the farmer to postpone reporting a payment by one year. To qualify for the exception, a tax payer must be able to show that the income from the crop for which the payment is received would have been reported in a year following the year that payment was received. Taxpayers who qualify for this exception have the option of reporting the payment as income in the year it is received or as income in the following year. The election to postpone reporting the payment as income covers all crops from a farm. A separate election must be made for each farming business of a taxpayer. For purposes of this provision, separate businesses are defined as those for which the tax payer keeps separate books and is allowed to use different methods of accounting. The election must No More Painting Ale a Available A#* G. BEN MILLER HENRY B. HOOVER AGWAY, INC. Rouzarvllla, PA 717-762-2386 1731 Main St., Ephrata, PA 717-733-6593 “P.S. Our Large Display In Showroom” be attached to the return (or amended return) for the tax year in which the-payment was received. The statement must include: 1. The name and address of the taxpayer. 2. A declaration that the taxpay er is making an election under Sec tion 451(d). 3. Identification of the specific crop or crops destroyed or damaged. 4. A declaration that under the taxpayer’s normal business prac tice the income derived from the crops that were destroyed or damaged would have been included in gross income for a tax year following the tax year of such destruction or damage. 5. The cause of destruction or damage of crops, and the date or dates on which such destruction or damage occurred. 6. The total amount of payments received from insurance carriers. Each specific crop must be item ized, as well as the date each pay ment was received. 7. The name(s) of the insurance carrier or carriers from whom pay ments were received. t Example: A farmer normally sells soybean and com crops in the year after they are produced. In 1988, both the soybean and com crops were damaged by drought Insurance covered the loss. The fanner received the insurance company payment of $12,000 for soybeans and $lO,OOO for com in November 1988. The farmer can postpone reporting the $22,000 of income by attaching the following statement to the 1988 return. The farmer cannot postpone reporting the payment for one crop unless he/she postpones reporting the payment for both. Attaching the following statement to the 1988 return. The farmer cannot postpane reporting the payment for one crop unless he/she postpones reporting the payment for both. Election Under Section 451(d) To Postpone Recognition Of Crop Insurance Proceeds Taxpayer’s Name 000-00-0000 (Social Security Number) RR4 Anytown, PA 00000 The above taxpayer hereby elects to postpone the recognition of the following crop insurance pro ceeds. The income from the crops for which these proceeds were received would have been included in gross income in a year following the year of destruction or damage under the taxpayer’s normal business practice. Crop Destroyed or Damaged Soybeans Corn Under the Drought Relief Act of 1988, producers may receive assis tance in several different forms. Producers in declared disaster areas are allowed to graze, make hay. or otherwise use the forage on set-aside acres. This provision has no unusual income tax consequ ences. Producers who use cash accounting can deduct the cost of harvesting the crop and will have a zero basis in the crop. Therefore, if the crop is sold, the entire proceeds of the sale must be reported as income on line 4 of Schedule F. If the crop is fed to livestock, there is no basis to deduct Participants in the Conservation Reserve Program in certain coun ties are allowed to graze, make hay, or otherwise use the forage on the CRP land. However, if the land is grazed or the crop is otherwise harvested, the participant’s rental payment for 1988 will be reduced by 25 percent unless the crop is donated to another producer through a state agency. At the time this article was writ ten, the Internal Revenue Service had not taken a position on the tax consequences of this provision. gd: Business Seminar Larry C. Jenkins Associate Professor Penn State EXPENSING CAN ADD LARGE TAX DEDUCTION Farmers looking for ways to increase their tax deduction should be aware of the Section 179 expensing deduction, which per mits a one-time write-off of up to $lO,OOO. The deduction can be used to offset income from farm ing, thus reducing income tax obligations. To qualify for the deduction. Date of Destruction Payment Cause or Damage Received Drought 6/88-8/88 $12,000 Drought 6/88-8/88 farmers must have purchased depreciable, tangible property for business use. The property must have been placed in service in 1988, and must be of a type that would qualify for investment cre dit if that credit were still avail able. The most common type of property that qualifies is machin ery and equipment The expensing deduction is lim ited to the amount of taxable income from active conduct of all trades and businesses. Even if the trade or business in which the qual ified investment is made produces no income for the year of invest ment the expense deduction still can be taken. As long as the tax payer has $lO,OOO of taxable income from any other actively conducted trade or business, the above limitation is satisfied, and the deduction will be allowed. A full-time farm operator can claim the $lO,OOO deduction only if taxable income from farming is at least $lO,OOO. If tax able income is less than $lO,OOO, the expensing deduction could be claimed in an amount equal to the amount of taxable income. The difference between the amount taken and $lO,OOO is then carried over to a later year. Taxable income, for purposes of the taxable Silvers Addresses New York State Grange CORTLAND, NY The New York State Grange must adapt to societal trends if it hopes to reverse a declining membership. National Grange Executive Com mittee Chairman Jack Silvers said recently. Silvers, a fruit farmer from the state of Washington, was the fea- No More Rotting Lancaster Farming, Saturday, Novambtr 19,1988-El9 Date of Insurance Payment Carrier 11/24/88 Crop Insurance, Inc. 11/24/88 Crop Insurance, Inc. $lO,OOO income limitation, is computed without regard to the cost of any property that qualifies for the expensing deduction. Taxpayers who elect expense deductions but do not gain imme diate tax benefits may be able to do so in the following year. Taxpay ers have the right to carry forward the expense deduction. Without the election, taxpayers can only recover the cost of the property through Modified Accelerated Cost Recovery System deductions. The expense election can be made for any amount of qualifying property (up to the maximum $10,000), no matter when the property is placed in service in the year of the election. A taxpayer may choose to expense all of the cost of one item, or all of the cost of several items, or parts of the costs of several items, subject to the dol lar limitations. It’s up to the tax payer to pick which item or items to expense and, if more than one item is involved, to apportion the cost to be expensed. A taxpayer who makes the expense election must reduce the unadjusted basis of the qualifying property by the amount of the expense deduction. This will result in a somewhat lower deduction from regular depreciation. lured spreaker at the state Grange’s 116th Annual Session. The session’s opening banquet drew more than 500 people to the Holiday Inn in Cortland. Silvers challenged grangers to “accept the challenge of change... challenge your thinking about where you’re going and where you should be in the future.” Silvers, who said membership concerns are nationwide, urged grangers to face such trends as shifts in population, increased mobilization of the population and competition with other organiza tions for membership. The Grange must convince people that it pro vides something special if it hopes to draw more interest. Silvers called the Grange a “family organization” that stresses family involvement. The Grange deals primarily with rural and agricultural issues, but serves peo ple in both urban and rural areas. “I don’t have the answers,” he said in summary, “but I sure do have some questions.” Silvers’ address kicked off five days of activity that will include action on dozens of resolutions up for consideration. Resolutions passed by the State Grange are later considered during the National Session, scheduled this year in Redding, Calif. A number of other distin guished speakers will take the podium before the end of the ses sion Tuesday, and among them will be Donald Butcher, New York State’s Commissioner of Agriculture and Markets.
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