Insurance Payments From Crop Damage Are Income
Here's some bad news if you're a farmer having a not-so-hot (or maybe way-too-hot) year: Any insurance payments from crop damage have to be counted as income on your tax return. This sounds pretty bleak, as it means that you still have to pay taxes on insurance payments that are designed to save you in times of trouble. Crop disaster payments, which are generally provided by the federal government, are also taxed as income.
There are a couple of ways to minimize your tax burden if you do have to claim crop damage payments. For instance, you can elect to have income tax withheld from crop disaster payments from the government so you aren't hit with a big bill at the end of the year. As for crop insurance payments, you are allowed to postpone paying income tax on them for one year if you use a cash method of accounting and can show that you would include income from the damaged crops in any year following the damage [source: IRS].