What is in this article?:
- Southwest ag producer tax deferment strategies
- Insurance payments are income
Farmers and ranchers may face added tax liabilities because the Internal Revenue Service considers insurance settlements on the farm and ranch as taxable income.
Prolonged drought conditions and unexpected wildfires plagued many farmers and ranchers across Texas and the Southwest last year, causing them to suffer unexpected losses in revenue. But many of them are now discovering they face added tax liabilities because the Internal Revenue Service considers insurance settlements on the farm and ranch as taxable income.
A Texas AgriLife risk management specialist is advising agricultural producers who suffered losses as a result of a federally-recognized natural disaster that they may qualify to defer taxes due on insurance settlements or capital gains from livestock sales last year for up to four years, provided they make use of the appropriate IRS forms and follow procedures required to secure deferment options.
"This will affect farmers and ranchers who lost physical improvements or animals on the farm and ranch last year. In the case of loss by wildfire for example, barns, fences, storage bins and other physical property may have been insured and these insurance payments or settlements, if issued last year, are considered taxable income. The same can be said for livestock producers who had to cull their herds because of drought conditions. In this case, the income, or revenue, coming from the sale of those animals could be deferred for up to four years," reports DeDe Jones, a Texas AgriLife risk management specialist in Amarillo.
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"If your operation falls into one of the 108 counties in Texas, for example, that were declared a national disaster because of drought, or even if it is located in a county adjacent to one that was included in a disaster declaration, then you would qualify for a four year deferment on capital gains received, whether those capital gains come in the form of selling off livestock or as payments from insurance," she explained.
According to the IRS, insurance payments must be considered taxable income and so must revenue generated from selling livestock, regardless the reason you needed to sell them.