Perhaps you have enrolled in one of USDA’s disaster assistance programs to help mitigate losses from a natural disaster. What are some tax implications to consider associated with these programs? Oklahoma State University Extension’s J.C. Hobbs starts with casualty losses of property, clarifying what is not considered a loss event.
“Has to be something that’s sudden, unexpected, unusual, and something that you didn’t do to actually cause that problem.”
In determining the amount of loss, insurance proceeds may reduce the deductible loss.
“There’s some tax rules that do apply that we’ve got to work through, and those tax rules basically play out how much of a specific loss is truly deductible. Where is deductible on the tax return? For example, a business loss will show up on the business portion of the return, whereas a personal property loss would be an itemized deduction.”
So, in the context of a USDA disaster assistance program, take, for instance, the Emergency Conservation Program, which provides financial assistance for replacing fencing for livestock and property.
“Essentially, you’re going to rebuild that fence, replace it. Then we’re looking at the value of the fence that was lost. Here comes the problem with that. A fence that we build on the farm is depreciated to zero within seven years. So if that fence is more than seven years old, more than likely its value for the tax purposes is zero. Consequently, any reimbursement that would come is going to be taxable to the extent that it is greater than the cost of replacing that fence.”
Then there are aspects of USDA’s Livestock Forage Disaster Program, which can help replace hay or feed. In the context of taxes:
“Feed loss is a little different ballgame. It’s normally a deductible expense in the year that we buy it. So if we get reimbursed for some of that, we may not have a fully deductible expense, but more than likely we’ll have to use that money to buy the replacement feed. Therefore, that reimbursement comes out being zero and nontaxable. So you really got to look at what the item was and if there’s any reimbursement from USDA or even from an insurance company that impacts how much of that loss is being taken care of from proceeds from either an insurance company or USDA. Again, that has an impact on the amount of the tax deduction as a loss or the potential for a taxable gain.”