Adjusted Gross Revenue AGR Insurance

1
Adjusted Gross Revenue (AGR) Insurance

• George Patrick
• Dept. of Agr. Economics
• Purdue University
• W. Lafayette, IN
• Presented at NCIS National Claims Managers
  Conference 1/26/99. Views expressed are those of
  the author and do not necessarily represent those
  of RMA or NCIS.

2
RA/CRC and AGR Corn/Soybean Farm

• Producer yields (APH) used to establish yield
  guarantee
• Futures prices used to establish prices
• Combine corn/soybean coverages
• Whole farm coverage (2 enterprises)
• Diversification discount
• Revenue generated in the insurance year

3
Overview of AGR Insurance

• Whole farm revenue insurance
• Whole farm
• Revenue based (production, not later phases)
• Based primarily on Schedule F
• Simple - avoids complex records
• Readily available information from producer
• AGR is not adjusted gross income (AGI) used by
  tax professionals

4
Three Coverage Levels

• 65 with 75 payment rate
• available to all producers
• 75 with 75 payment rate
• must have at least 3 commodities
• 80 with 75 payment rate
• must have at least 8 commodities
• Each commodity must met min. revenue level for
  the higher coverage levels

5
AGR Revenue Protection

• Approved coverage is lesser of
• a.) 5-year Schedule F average
• or b.) Expected revenue
• (Gross X coverage X .75 Protection)
• Adjustment for expansion or contraction of
  business

6
Loss Payments

• Start when adjusted gross revenue is less than
  AGR X coverage level
• Ex 100,000 AGR X 75 75,000 protection, loss
  paid at 75 (25 co-pay)
• Producer has adjusted gross revenue of 60,000,
  pay 75 of (75,000 - 60,000)
• 75 of 15,000 or 11,250 indemnity

7
Three Pilot Areas in 99

• New England - a wide variety of crops -retail,
  wholesale, resale, greenhouses
• Michigan - fruits and vegetables, nurseries with
  some corn and soybeans
• Florida - vegetables, U-pick, wholesale,
  greenhouses, specialty crops, and livestock
• Diversity is good for pilot project

8
Farmers Tax Records

• Almost all farmers use cash accounting for income
  tax reporting
• Income is reported when constructively received
• Allowable expenses for taxes are deducted when
  actually paid
• Cannot borrow from seller and deduct
• Can prepay without delivery and deduct

9
Farmers Tax Records

• Net farm income for taxes can legally be managed
  for benefit of the producer
• Net farm income for taxes may have little
  relationship with economic income
• Receipts (income) deferred
• Expenses accelerated
• Inventories are NOT required by tax law

10
AGR Application

• Five years Schedule F and other records
• Used primarily to establish revenue
• Five years evens out year-to-year
  variability and some tax management
• Beginning inventories
• Planned changes that will reduce revenue
• Commodity history when 75/75 or 80/75 coverage
  levels are selected

11
Schedule F Walk-Through

• Parts I and III
• Farm Income (cash and accrual)
• Part II
• Farm Expenses (both)
• Part IV
• Principal Agricultural Activity Code

12
Schedule F - Farm Income and Expenses

• Income is broader than AGR farm income (i.e.,
  custom work done)
• Other income items (i.e., govt payments,
  patronage distributions)
• Does not include sales and other dispositions of
  animals used for draft, breeding, dairy, or
  sporting purposes

13
Allowable Income - Sch. F

• Lines 1-3 Sales of livestock and other items
  purchased for resale
• (e.g., feeder pigs/cattle, produce)
• Can deduct cost only in year of sale
• Line 4 Sales of items produced for sale
• Very broad category
• Items not raised for sale are excluded (tax)
  (livestock for draft, breeding, or dairy)

14
Allowable Income - Sch. F

• Line 5b - Taxable co-op distributions
• HB/Policy sale of agr. commodities
• Line 7 - CCC loans reported/forfeited
• Effectively sold for tax purposes
• Line 10 - Other income
• Fuel tax credits, barter income, etc.
• Bypassed acreage/mkt. diversion payments
• Catch-all for tax purposes Caution

15
Allowable Income -Exclusions from Sch. F

• Line 5a - Cooperative distributions related to
  purchases of inputs/supplies ???
• HB p. 40-41 not directly related to production
  of an insured agr. commodity
• Line 6a - Agr. program payments
• (i.e., PFC, MLAP, cost-sharing)
• Line 9 - Custom/machine work done

16
Allowable Income - Exclusions from Sch. F

• These are excluded from historic AGR, but
  included in AGR for claim purposes
• Line 8 - Crop insurance proceeds and certain
  disaster assistance
• Gains from commodity hedges

17
Allowable Expenses - Schedule F

• Most direct production related expenses are
  included (seed, fertilizer, chemicals)
• Exclusions tend to focus on tax-related
  ownership costs
• These can vary widely among producers with little
  impact on production
• Considerable tax planning may be involved

18
Allowable Expenses - Schedule F Exclusions

• Line 16 Depreciation and Sec. 179
• (include only amount allowed for livestock)
• Lines 17, 24 for shareholders, 25
• (labor related deductions)
• Lines 23 a and b - Interest paid
• Lines 26 a and b - Rents paid
• Line 31 - Taxes
• Line 34 - Other (Caution catch all-taxes)

19
Adjustment to Accrual

• Bookkeeping/accounting viewpoint
• 1. Income adjustments
• Change in inventory of commodities
• Change in accounts receivables
• 2. Expense adjustments
• Change in inventory of input/supplies
• Change in accounts payable
• 3. Change in machinery/equipment/LS

20
Inventory Adjustments

• Farmers may be familiar with adjustments because
  lenders often require them
• Valuation can be a problem if market price
  changes during the year
• Quantities may difficult to determine - typically
  more attention is given to commodities than
  inputs and supplies

21
Adjustments in Loss Year

• 1. Accounts receivable - easier than others
• (i.e., deferred payment contract)
• Valuation in and can aggregate
• Beginning and ending balances
• If decrease in amount, reduce allowable income by
  decrease
• If increase in amount, increase allowable income
  by increase

22
Adjustments in Loss Year

• 2. Animal, crop, and commodity inventories
• (conceptually can be handled as)
• If inventory is reduced during the insurance year
  - allowable income is reduced by that amount
• If inventory increases during the insurance year
  - allowable income is increased by that amount

23
AGR Inventory Valuations

• Animals and Commodities for Resale
• Beginning - local market value 1/1
• Ending - local market value 12/31
• Both reduced by cost of commodity in inventory
• Other
• Valued at sales price if sold before claim is
  finalized
• Local market price 1st of the month claim is
  finalized

24
AGR Inventory Adjustment

• Beginning inventory value, if sold, is not
  included in allowable income of claim year
• Prior years production
• Ending inventorys value, if produced during the
  year, is included in allowable income of claim
  year
• If beginning 99 inventory is carried into 00,
  then not in allowable income

25
Adjustment to Expenses

• Prepaid expenses
• Inputs purchased in one year for use in a future
  year
• Accounts payable for allowable expenses
• Similar inventory adjustments may be made in a
  loss year, if necessary

26
Livestock

• Animals purchased for resale - net is reported on
  Line 3 of Schedule F.
• Sales of animals held for sale in the ordinary
  course of business reported on Line 4 of Schedule
  F
• Animals held for draft, breeding, dairy and
  sporting purposes - sales and other dispositions
  reported on Form 4797

27
Livestock and Taxes (I)

• Raised livestock are zero basis assets
• Expenses of raising them were deducted
• If sold, entire sales price is income
• Ordinary income if held 1 year or less (2 years
  or less for cattle)
• Capital gain income if held for more than 12
  months (more than 24 months for cattle)
• Income but not earnings for self-employment tax
• If animal dies, no income (unless insured) or
  deduction for loss

28
Livestock and Taxes (II)

• Purchased livestock for breeding/dairy are
  treated like any other business asset
• Tax basis is equal to purchase price
• Recovered by Sec. 179 or depreciation
• Tax basis is reduced by cost recovery
• Adjusted tax basis refers to the unrecovered cost
  of the animal
• If animal dies, unrecovered cost is deducted

29
Livestock and Taxes (III)

• If sold, unrecovered basis is not income
• Have a loss if sold for less than basis
• Have depreciation recapture if sold for more than
  basis
• Have a gain if sold for more than purchase price
• Ordinary income or capital gain depending on
  holding period

30
Form 4797

• Reports sales of business property, not just
  livestock
• Raised livestock go in Part I or II depending on
  holding period
• Purchased livestock go to Part II if not held for
  1 year (2 years for cattle)
• Purchased livestock held required period
• Part I if sold at a loss
• Part III if sold at a gain

31
Weather-Related Sales

• Defer income from excess sales into year
  following the year of sale.
• This is included in AGR allowable income for the
  year of sale
• Pick-up decrease in inventory of animals
• This offsets higher revenue
• Must decrease expected income for the next
  insurance year

32
Weather Sales of Livestock

• Involuntary conversion - have two years following
  year of sale to replace and not recognize
  (report) income
• - allowable AGR income
• Amount of income depends on whether raised or
  purchased livestock (Form 4797)
• Reduce ending inventory of animals
• Reduce expected income for next year

33
Other Livestock Casualties

• Fire, lightening, disease
• Theft
• Producer may be insured. Tax laws allow
  reinvestment in like-kind property without
  recognition of income
• May be immediate or delayed

34
Livestock Problems

• Breeding stock is an input as well as an asset
• Raised animals are revenue, although there may be
  considerable lag
• Purchased animals are not revenue - tax law
  covers all cases
• Multi-year effect - decreased revenue