Tax Guide for Farmers – Deductible Expenses, Part 6

The Internal Revenue Code has specific statutes that pertain to farming businesses and the treatment of farming income and expenses. Once section of the Code pertain to insurance, which is the subject of this article.

This article is the sixth in a series on deductible business expenses associated with farming. The previous articles on deductible expenses covered Prepaid Farm Supplies, Prepaid Livestock Feed, Hired Labor, Interest, and Taxes.

Insurance

In general, you can deduct the cost of premiums related to your farm business as a business expense. Insurance for which you can deduct premium payments includes the following:

  • Insurance on business assets related to crops, fire, general liability, storm damage, and theft.
  • Health and accident insurance for your farm employees.
  • Workers’ compensation insurance as required by state law, which covers any claims for job-related injuries or diseases suffered by your farm employees.
  • Insurance to cover the interruption of your farming business.
  • State unemployment insurance on your farm employees (as taxes in states where such insurance payments are considered a tax under state law).

Insurance to Secure a Loan

If you take out a life insurance policy on yourself or another person with a financial interest in your farming business for the purpose of covering a business loan, you cannot deduct the insurance premiums you pay on that life insurance policy. However, in the event the insured dies, the insurance proceeds from the policy are not taxed as income even if they are used to repay the loan.

Prepaid Insurance Premiums

You can deduct prepaid or advance insurance premiums only in the year to which they apply, regardless of the accounting method used in your farming business.

For example, on July 1, 2016, you purchase a two-year insurance policy for the silos used to store crops in your farming business. The cost of the insurance policy is $2,000.

In  2016, you can deduct only the premiums related to the 6 months between July 1, 2016, and December 31, 2016. Since the policy covers two years, or 24 months, you can deduct one-quarter of the insurance premiums in 2016, or $500.

In 2017, you can deduct 12 months of insurance premiums, or $1,000. You can then deduct the final $500 in insurance premiums in 2018.

Business Interruption Insurance

The premiums to cover use and occupancy of your farm in the event of business interruption are deductible as a business expense. Business interruption insurance typically covers lost profits in the event your business is shut down because of fire, storm damage, or other events.

Self-Employed Health Insurance

If you are self-employed, you can deduct on your Form 1040 the premium payments you made for medical, dental, and long-term care for yourself, your spouse, and any of your dependents. This deduction is taken as an adjustment to gross income. In addition, you can deduct the health insurance premiums for any child under the age of 27 as of the end of the current tax year even if he or she is not your dependent.

Typically, the deduction for health premiums cannot exceed the net profit from the business with which the insurance policy was established.

If you or your spouse are the employee of another person under which you are eligible to participate in a health insurance plan maintained by that employer, you cannot take a deduction for health premium payments.

How can I get answers to other questions I have about insurance?

You can speak with a tax attorney to get additional help on your tax questions related to insurance in a farming business. There are tax attorneys who specialize in the sections of the Internal Revenue Code pertaining to farming.

By completing the form below or calling the phone number at the top of this web site, you can speak with a tax attorney. Your initial conversation with a tax attorney about your situation is free of charge. All conversations with a tax attorney are protected by attorney-client privilege.

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by Mark Johnston

Mark has been a contributor to legal web sites related to bankruptcy, tax, and criminal law since 2011. He has an Accounting degree from Texas A&M University.