crop insurance for 2012

[JenMO]

TP had crop insurance and was supposed to be paid in 2012. Ins Co was slow and checks did not come out until 2013. TP consistently sells in crop in year that he grows, does not hold over until next year. Can I report the crop proceeds for 2012 even though he did not receive checks until 2013? If he has to report in 2013, he will have 2 crop incomes in one year.

[Koss]

Constructive Receipt?

Under the basic rules for the cash method of accounting, I think your client is stuck reporting the income in 2013, especially if the date on the check is 2013. Moving it back to 2012 feels like a real stretch.

Of course, if the check was issued in 2012, but your client didn't cash or deposit it until 2013, then you have a good reason to report in 2012.

If the payor didn't even approve the payment until 2013, I just don't see any way to put it back in 2012.

If, hypothetically, they had issued the check in 2012, but made out the check incorrectly, with the wrong name or something, and then they had to re-issue the check in 2013 to correct the error, you could begin to craft an argument for constructive receipt, or form over substance. But it doesn't sound like that's what happened. LOL

BMK

[Koss]

Slow Payment

Of course, the real answer is that the payor should be just as slow at the end of this year. Then your client won't have two payments in one year.

What's the real harm, anyway? If he gets one insurance payment in January 2013 and another one in December 2013, is that going to bump him into the next tax bracket? If not, what difference does it make?

Underpayment penalty? The unexpected income came in this month. So he can increase the estimated payment that he'll make on 04/15/2013 to address the issue.

Since he was expecting income in December, 2013 that he did not actually receive, he should have a lower tax liability, for 2012.

BMK

[JenMO]

It will bump him up, and if crops fail in 2013, maybe the payment will be late again, but if he has a bumper crop in 2013, his income will be significantly higher. Estimate taxes are not an issue because as a 2/3 income farmer, he pays by March 1 and doesn't have to estimate. Farmer will have less income and more crop expense in 2012

[Roland Slugg]

This is pretty cut and dry. If the farmer uses the cash method for the farming activity reported on Schedule F, then the check represents 2013 income. However if he uses the accrual method for the farming activity reported on Schedule F, then the check represents 2012 income.

If the taxpayer uses the cash method, and if the dollar amount is significant, and if the higher taxes resulting from two years' income landing in one year would justify it, your client may wish to consider going for a change of accounting method with respect to his farming activity ... i.e. Schedule F ... only. It may even be possible to do this using one of the IRS's many pre-approved method changes. I suggest that you consult the instructions to F-3115, looking especially at automatic change number 124. I have not studied the specific provision in detail concerning that change, but before proceeding you certainly should. (Section 14.09 in the Appendix to Rev. Proc. 2011-14.) I suspect that reference discusses changes that are less significant than a change in the method of reflecting gross sales, but it should be worth reading. You should also consider the long-term effect of making a change of this magnitude.

I don't envy anyone completing a F-3115. Unless the tax is significant, I would be loath to recommend such a change like this just because of a one-year timing "problem." On the other hand, we on this Board don't know if you're talking about $2,500 ... or $250,000.

[AJsTax]

averaging

Farmers are one of the very few that can still use income averaging (Form J) because their income can vary so much from year to year. That would be something to keep in mind going into this next year.

[Golden Rocket]

Tobacco Farmers

your client may wish to consider going for a change of accounting method with respect to his farming activity ... i.e. Schedule F ... only. It may even be possible to do this using one of the IRS's many pre-approved method changes.

From Slugg's comment I will emphasize his use of the word "only." This means you can go on accrual basis for the farm while remaining on cash basis for the remainder of everything else reported.

When I was growing up on the farm, our family and all our neighbors grew tobacco. Farmers paid out cash all year long for production costs, and received ONE CHECK from the tobacco company at tobacco auction when the tobacco was sold. But the process for tobacco does not stop at harvest, and it must "cure" in cool weather over a period of several weeks before it is suitable to be taken to the tobacco auction.

The result of all this discussion is that the check from the tobacco company comes very late in the year, usually by Christmas, but maybe 20% of the time does not come until the following January. Sometimes the tobacco company is just late, sometimes extreme dry weather causes the tobacco to not be ready, etc. etc. etc.

I know for a fact other farmers reported January checks as prior year income. Don't know how they did it, but am not aware of a single instance where they got in trouble. From the perspective of the IRS and the original post: they wouldn't care that the income was reported in 2012, but they probably would want it reported in 2013 whether it was duplicated in 2012 or not. They are never concerned that revenue is over-reported unless it costs them money (EITC for example).

For a farmer/taxpayer who wishes to report crop income in the year to which it applies, I would advise to select the Accrual method on the Schedule F on his very first return, and get permission to change if he has not done so in prior years.

[Roberts]

If there is a history of reporting these types of payments in the year expenses were incurred and the payment is only slightly after the beginning of the year, I'd continue that pattern.

I do a BUNCH of landlord type returns and it's pretty common to receive rent checks after the 1st of the year. I do NOT delay reporting those until the next year because it would be a paperwork nightmare keeping track of it all and clients don't want it delayed.

The IRS is far more interested in you trying to delay the reporting of income than reporting it early.

[Roland Slugg]

I do a BUNCH of landlord type returns and it's pretty common to receive rent checks after the 1st of the year. I do NOT delay reporting those until the next year because it would be a paperwork nightmare keeping track of it all and clients don't want it delayed.

Wow, that's quite an admission. Do your clients know you do that? And are you sure they all approve of that improper practice? Each time you do it represents a clear-cut failure to follow the law. Also, since most rents are due on the 1st for the ensuing month, it is common for rent checks to be received on or shortly after the 1st. Are those checks that your clients receive in January, that you report for them as if they were received the prior December, for December's rent ... or January's?

The IRS is far more interested in you trying to delay the reporting of income than reporting it early.

I'm not buyin' that either. The IRS is charged with the responsibility of collecting the correct tax, and no agent I have dealt with would give a pass on what you say you do.

As far as your "paperwork nightmare" rationale is concerned, it's more trouble to do what you claim than it would be to just report the income received ... in the year it's received.

[Roland Slugg]

Farmers are one of the very few that can still use income averaging.

Excellent reminder! I, for one, completely forgot about that. It's a lot easier than completing and filing F-3115, too. And even if income averaging doesn't result in quite the same tax for the two years combined, the one-year delay in paying the tax on the income received late is worth something ... even in today's low interest rate economy.

[Snaggletooth]

Credence to Roberts

The Roberts scenario is not really so far-fetched.

I understand Roberts admits he might do this, although I don't think anyone would argue that it is correct.

We live in an imperfect world, and even with aggressive auditors, consider what they would have to do bring these returns into flawless reporting. Remove the income from the taxpayers' return. Write it up. Add the income to Year 2. Write it up. Remove the end-of-year income from Year 2. Add the income to Year 3. Write it up. Etc. Etc. Etc. through the statute of limitations.

And what does our starry-eyed auditor have when he is through?? Income hitting in the right years, but in general a refund to early years plus interest and a charge to later years plus interest. Given consistent tax brackets, there is virtually no appreciable change in tax, and more interest refunded than collected. Starry-Eye has wasted a whole half day playing White Knight to the altar of Purity, and for nothing in the eyes of his supervisor.

The above example falls down if the auditor discovers income has been shifted from a higher-bracket year to a lower-bracket year. But I believe Mr. Roberts has thrown that possibility out of his Neighborhood. Speaking in terms of generalities and not specifically crafted situations, I think Roberts has portrayed a "real-world" approach, and it really DOES happen, much to the chagrin of those trained to do things correctly.