Tax Strategies for Farmers

Tax Strategies for Farmers

Weather-related losses means government assistance programs

are available for northern Michigan farmers

By Chris Morse

This year, Michigan Gov. Rick Snyder has requested that the federal government declare certain areas of Michigan, including the Grand Traverse region, a disaster area due to the severe impact of weather-related crop losses in early 2012.

Various tax opportunities and government assistance programs are available to support farmers as they deal with the risks inherent in their business, helping to cushion the financial impact when a farm experiences operating or casualty losses.

Disaster Area Casualty Losses

In addition to being eligible for federal assistance, there are several favorable tax rules applying to presidentially declared disaster area losses, i.e., those that are eligible for federal assistance under the Disaster Relief and Emergency Assistance Act.

The IRS allows farmers to deduct these disaster losses on their current income tax return or an amended return for the immediately preceding tax year. The deduction must be elected by the due date (without extensions) for filing during the year in which the disaster occurred, or the due date (with extensions) for the return for the preceding tax year, whichever is later.

For example, an individual farmer who filed a 2011 Form 1040 in February 2012 and incurred a federally declared disaster loss in March 2012 has until April 15, 2013 to elect to amend his 2011 income tax return, treating the loss as if it had incurred in 2011. This accelerates the income tax refunds resulting from the casualty loss.

Net Operating Losses

If a farm's operating expenses exceed its income for the year, farmers may have a net operating loss (NOL). NOLs can be carried back and included in a recalculation of prior year income taxes, enabling the filer to a refund of all or part of the income taxes paid in past tax years.

It is also possible to carry forward the NOL and reduce the amount of tax in future years. The normal carryback period is two years, though losses attributable to a casualty, theft or presidentially declared disaster may qualify for a three-year carryback. Keep in mind: Losses resulting directly from the farming operation may be carried back five years. Again, the purpose of these rules is to accelerate the income tax refunds resulting from losses.

Crop Insurance and

Disaster Payments

Crop insurance proceeds, as well as crop disaster payments received from the federal government (due to destruction or damage to crops or the inability to plant crops due to drought, flood or other natural disasters) are generally included in taxable income the year it is received.

When a farmer uses the cash method of accounting and receives crop insurance proceeds or disaster payments in the same tax year in which the crops are damaged, reporting the proceeds as taxable income can be postponed until the following tax year.

Emergency Loan Programs

A disaster-area declaration is one of the requirements necessary to qualify farmers operating in impacted counties for the USDA Farm Service Agency (FSA) loan program. The USDA's FSA provides emergency low-interest loans to help farmers recover from losses due to drought, flooding and other natural disasters.

The loan funds may be used to assist with farm-related expenses, pay essential family living expenses, or assist with refinancing certain debts. Other state-level loan programs are currently being considered by the Michigan legislature.

The business of farming has enough risk involved. A tax advisor can assist with making elections, as well as the necessary statements to be included with tax returns in order to take advantage of the deductions and programs available to farmers.

Chris Morse, CPA/PFS, MST is the tax principal-in-charge for Rehmann's west Michigan region and works in the Traverse City office. He has more than 25 years of experience providing accounting, tax, financial planning and business consulting to a variety of clients, including food processors, farms, wineries, construction companies, high-tech enterprises, manufacturers and the oil and gas industry. Contact him at 231.946.3230 or email