Impact Of Government Payments
Should Be Carefully Considered

By Jose G. Peña
Extension economist

The income tax implications of government payments should be carefully taken into account during income tax planning. Over one-third of this year's U.S. net farm income is coming in the form of government payments.

The bulk of the $8.7 billion in emergency aid for farmers approved in the fiscal year 2000 agricultural spending bill signed by President Clinton in October has been distributed. Direct government payments are forecast at $22.5 billion, the highest in history. The previous high was $16.7 billion in 1987. Loan deficiency payments and a supplemental AMTA payment account for the majority of the increase in payments over 1998.

While most of the government payments have been made, some payments are still pending. Some farmers have already received loan deficiency, regular Market Transition Act payments as authorized by Farm Bill '96, and supplemental AMTA payments well as disaster assistance payments as authorized by the October '99 emergency farm aid bill.

While producers did not have the election to defer supplemental AMTA payments authorized by the 1998 and 1999 bills, some elected to receive all or part of their regular 1999 AMTA payment in 1998 and may request to receive all or part of their regular 2000 AMTA payment in 1999. Others have received crop insurance settlement payments and still others received part of the disaster assistance payments authorized by the disaster assistance bill of 1998 this year.

In addition, some ranchers who began restocking with livestock last spring are liquidating their herds this fall due to this year's dry fall period. As of Tuesday, November 23, when this article was prepared, the August-November 22, 1999 period in Southwest Texas is the third driest fall period on record with just slightly over 2.8 inches of rain, compared to a long term average of almost nine inches during the same period.

Reminder — If a rancher deferred the gain from liquidating breeding livestock in 1996, he/she was required to replace the livestock within two years (1998). If the breeding livestock were not replaced within the two year period, the taxes saved from the sale were due unless the rancher filed a one-year extension. If the breeding livestock have not been replaced even now, another one-year extension should be filed or the taxes paid.

Ranchers who are having to liquidate their herds due to the dry period should carefully review the tax consequences of drouth-forced livestock sales.

Loan Deficiency Payments

Loan Deficiency Payments 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/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, on the cash method of reporting, decides to report CCC loan proceeds as income in the year the loan is received, he/she must make an election to this effect in his/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

Transition payments received, as mandated by Farm Bill '96, including the supplemental payments authorized by the disaster assistance bill of 1998 and the emergency farm aid bill of 1999, are taxable in the year received. As mentioned above, Farm Bill '96 allows eligible producers to elect to receive all or part of their transition payments for 2000 before the end of this year. If the election is made to receive this payment in 1999, they are taxable this year.

Crop Insurance and Disaster Payments

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.