Government Disaster Payments
Require Careful Tax Decisions

By Jose G. Peña
Extension economist

President Clinton last week vetoed the $4.2 billion farm aid bill which earlier passed the House and Senate. While both branches of government support a farm assistance program, it appears that the differences focus on the amount of funding. The President explained that the bill approved by Congress "fails to respond fully to the needs of America's farmers."

The President and Democrats have been pushing a more expensive $7.3 billion plan that relies mostly on giving farmers an extra $5 billion through a program that subsidizes growers when commodity prices fall below set levels. At any rate, once the political games are over, some form of a disaster assistance bill will probably be passed before the end of the year. (At presstime, the House had passed and the Senate was voting on an omnibus spending package that included much of the same provisions Clinton had previously vetoed, albeit with a few sweeteners thrown in for certain groups. Details appeared unclear, even to the signatories. — Ed.)

The income tax implications of additional government payments this fall should be carefully taken into account during income tax planning.

While we don't know what the farm aid bill will provide, some farmers have already received loan deficiency and transition payments for 1998. Others have received crop insurance settlement payments. The farm aid bill may provide disaster assistance payments and Farm Bill '96 was amended to allow the advance payment of all or part of the transition payments due in 1999. In addition, some ranchers were forced to sell a higher number of livestock due to this past spring-summer drouth. The income tax treatments of some of these activities are included in this brief article.

Loan Deficiency Payments (LDPs) received must be reported as taxable income in the year received, even if the commodity is sold in another taxable year.

If, instead of receiving loan deficiency payments, a producer places his or her corn, for example, in the Commodity Credit Corporation loan program, the producer may elect to report the loan proceeds as income in the year received, rather than the year that the crop is normally sold. Normally, producers would report income from a crop in the year it was sold. If a producer using the cash method of reporting decides to report CCC loan proceeds as income in the year the loan is reported, he or she must make an election to this effect in his or her income tax return.

Once an election is made, all succeeding CCC loans must be reported in the same way. In subsequent years, producers may obtain permission from the Internal Revenue Service to change to a different reporting method. Producers are encouraged to consult their tax advisor to attempt to maximize the tax advantage of CCC loan reporting.

Transition payments received, as mandated by Farm Bill '96, are also taxable in the year received. As mentioned above, Farm Bill '96 was amended this year to allow eligible producers to select to receive all or part of the transition payments for 1999 before the end of this year. If the election is made to receive 1999 transition payments in 1998, they are taxable this year.

Normally, crop insurance and disaster payments are reported as income in the year of receipt. If, however, more than 50 percent of the crop in question is normally sold in the following taxable year, producers may elect to defer the proceeds to the following taxable year. If the election to defer is made, attach a statement with the required details to the income tax return.

The proceeds from the new crop revenue coverage insurance contracts are normally taxable in the year received.

Weather-related livestock sales

NOTE: The Taxpayer Relief Act of 1997 extended the postponement of gain from drouth-induced livestock sales to include all weather-related causes.

If a rancher is forced to sell livestock due to weather-related conditions, the gain on sale of the livestock can be postponed as follows:

(1) Gain from the sale of livestock (other than poultry) held for draft, breeding, or dairy (not sporting) may be postponed indefinitely if the livestock is replaced within two years of the end of the tax year of the sale and used for the same purpose as the original livestock. The taxpayer must show that the weather-related conditions caused the sale of more livestock than would have been sold without the weather-related conditions. The farmer's basis in the replacement livestock will be equal to the basis in the livestock sold plus any amount invested in the replacement livestock that exceeds the proceeds from the sale. To make the election, a rancher must attach a statement to his income tax return showing: (a) evidence of existence of the weather-related conditions that forced the sale or exchange of the livestock; (b) a computation of the amount of gain realized on the sale or exchange; (c) the number and kind of livestock sold or exchanged; and (d) the number of livestock of each kind that would have been sold or exchanged under the usual business practice in the absence of weather-related conditions.

NOTE: If the weather-related conditions persist. a request for an extension to replace the livestock may be submitted to the IRS.

(2) Producers who sold extra animals can elect to defer the revenue from sales of certain inventory livestock (steers, heifers, calves, sheep, goats, including poultry, etc.) for one year if the sales was due to weather-related conditions. Livestock purchased (stocker steers, heifers, etc.), as well as raised livestock, will qualify for this election. If, for example, because of weather-related conditions, a cow-calf producer sells livestock in excess of the number that would be sold in a normal business year, he or she may elect to include the sale proceeds in the next year's income provided that: (a) farming is the principal business of the taxpayer; (b) the cash method of accounting is used; (c) it can be established that under usual business the number sold would not have occurred except for weather-related conditions; and (d) the weather-related conditions have resulted in the area being designated as a disaster area. To make this election, a rancher must attach a statement outlining these requirements, similar to the statement above for breeding stock. Sales made before or after an area being declared a disaster area still qualify.