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Virginia Cooperative Extension -
 Knowledge for the CommonWealth

Potential Assistance Programs after a Natural Disaster

Farm Business Management Update, October/November 2003

By Gordon Groover and Daniel Osborne

Virginia farmers have had to address a number of years of abnormal weather events, e.g., droughts, floods, hurricanes, winds, above normal rainfall, frost damage, and so on. Listed below are major sources of information and programs from federal agencies providing assistance in the event of natural disasters and important tax considerations for farmers suffering from losses.

USDA Web Sites for Disaster Assistance Programs http://disaster.fsa.usda.gov/

This site has information for the national level and for specific programs. It may not have all the details about program implementation, but it will be useful for informing farmers about eligibility, where to apply, and deadlines. Local FSA offices may not have the details about programs when press releases are posted to this site. Local FSA offices do not get information until all procedures are in place to accept applications for a specific program. They are "encouraged" not to speculate about programs. Only when they get the final word from HQ will they discuss the details. I think we can understand the liability issues for the local FSA staff.

eForms http://forms.sc.egov.usda.gov/eforms/mainservlet

All forms that farmers need to file are on this site and can be printed and/or filed electronically. Farmers may still need to discuss specifics of each program with FSA, i.e., having access to forms does not imply farmers know what information is needed or how each form should be completed.

FSA News Release Subscription http://www.fsa.usda.gov/pas/subscribe.asp

Anyone can sign up to receive news releases from FSA. Gordon Groover and Mike Roberts in Southeast District currently review all news items and forward relevant releases to agents and subject matter specialists. We will continue to do so until enough folks complain. An archive of past releases can be found at http://www.fsa.usda.gov/pas/news/releases/index.htm

FSA-Emergency Loan Program http://www.fsa.usda.gov/pas/publications/facts/html/emer02.htm

Overview: USDA's Farm Service Agency (FSA) provides emergency loans to help producers recover from production and physical losses due to drought, flooding, other natural disasters, or quarantine.

Loan Uses: Emergency loan funds may be used to

Emergency loans may be made to farmers and ranchers who

Loan Requirements: FSA loan requirements are different from those of other lenders. Some of the more significant differences are the following:

Collateral Is Required

Loan Limit: Producers can borrow up to 100 percent of actual production or physical losses, to a maximum amount of $500,000.

Loan Terms: 1 to 7 years; and in special circumstances up to 20 years or up to 40 years.

Interest Rate: 3.75 percent.

Application Deadline: Applications for emergency loans must be received within 8 months of the county's disaster or quarantine designation date.

Emergency Conservation Program (ECP) http://disaster.fsa.usda.gov/ecp.htm

ECP shares with agricultural producers the cost of rehabilitating eligible farmlands damaged by natural disaster. During severe drought, ECP also provides emergency water assistance both for livestock and for existing irrigation systems for orchards and vineyards. ECP may be made available in areas without regard to a Presidential or Secretarial emergency disaster designation.

What are the Eligibility Requirements? To be eligible for ECP assistance, the applicant must have suffered a natural disaster that created new conservation problems, which, if left untreated, would

What Can I Use the Money for?

When Is ECP Assistance Available?

Noninsured Crop Disaster Assistance Program (NAP) http://disaster.fsa.usda.gov/nap.htm

The Noninsured Crop Disaster Assistance Program (NAP) provides financial assistance to eligible producers affected by natural disasters. This federally funded program covers noninsurable crop losses and planting prevented by disasters.

Who Is an Eligible Producer? An eligible producer is a landowner, tenant, or sharecropper who shares in the risk of producing an eligible crop. If you have questions regarding your eligibility, please contact your local FSA office.

What Is an Eligible Crop? Eligible crops include commercial crops and other agricultural commodities produced for food (including livestock feed) or fiber for which the catastrophic level of crop insurance is unavailable. Also eligible are controlled-environment crops (mushroom and floriculture), specialty crops (honey and maple sap), and value loss crops (aquaculture, Christmas trees, ginseng, ornamental nursery, and turfgrass sod).

What Is an Eligible Natural Disaster? An eligible natural disaster is any of the following:

How Do I Apply for Coverage? To apply for coverage you must file Form CCC-471, Application for Coverage, and pay the "Service Fee," $100 per crop per county, or $300 per producer per county, not to exceed a total of $900 per producer for all counties. The application and service fees must be filed by the application closing date as established by the producer's FSA state committee.

Emergency Haying and Grazing Assistance

Emergency haying and grazing of certain Conservation Reserve Program acreage may be made available in areas suffering from weather-related natural disaster.

Requests for assistance may be initiated by FSA county committees. The State committee then makes a recommendation to the Deputy Administrator for Farm Programs. Determinations are made on a county-by-county basis.

If approved, harvesting of hay and/or livestock grazing is allowed on cropland that has been removed from production of annual program crops, such as wheat and feed grains, and devoted to a long-term resource-conserving cover. To protect wildlife during the primary nesting season, other limits also may be imposed.

Small Business Administration Aid to Ag Related Businesses http://www.sba.gov/index.html Regional contact: http://www.sba.gov/va/index.html

Economic Injury Disaster Loans for Small Businesses http://www.sba.gov/disaster_recov/loaninfo/ecoinjury.html

Small businesses and small agricultural cooperatives that have suffered substantial economic injury resulting from a physical disaster or an agricultural production disaster designated by the Secretary of Agriculture may be eligible for the SBA's Economic Injury Disaster Loan (EIDL) Program. Substantial economic injury is the inability of a business to meet its obligations as they mature and to pay its ordinary and necessary operating expenses.

An EIDL can help you meet necessary financial obligations that your business could have met had the disaster not occurred. It provides relief from economic injury caused directly by the disaster and permits you to maintain a reasonable working capital position during the period affected by the disaster.

The SBA provides EIDL assistance only to those businesses we (who is we?) determine are unable to obtain credit elsewhere. The SBA can provide up to $1.5 million in disaster assistance to a business. This loan cap includes both economic injury and physical damage assistance. Your loan amount will be based on your actual economic injury and financial needs.

The interest rate on EIDLs cannot exceed 4 percent per year. The term of these loans cannot exceed 30 years. Your term will be determined by your ability to repay the loan. (See SBA publication No. DA-2, Physical Disaster Business Loans http://www.sba.gov/opc/pubs/da-2.pdf)

SBA - Home and Personal Property Disaster Loans http://www.sba.gov/disaster_recov/loaninfo/property.html

Individuals in a declared disaster area who are victims of a disaster may be eligible for financial assistance from the U.S. Small Business Administration -- even if they don't own a business. As a homeowner, renter and/or personal-property owner, you may apply to the SBA for a loan to help you recover from a disaster.

SBA- Physical Disaster Business Loans http://www.sba.gov/disaster_recov/loaninfo/phydisaster.html

Business -- large or small suffering physical damage as a result of a disaster may be eligible for financial assistance from the U.S. Small Business Administration. Any business that is located in a declared disaster area and has incurred damage during the disaster may apply for a loan to help repair or replace damaged property to its pre-disaster condition. The SBA makes physical disaster loans of up to $1.5 million to qualified businesses.

USDA Rural Development Programs

USDA Rural Development information: http://www.rurdev.usda.gov/rhs/
VA information: http://www.rurdev.usda.gov/va/

USDA Rural Development makes every effort to help borrowers who are victims of a disaster to recover from the financial hardship, to minimize the potential delinquency or liquidation, and to protect the Government's interest. Community Facilities: The Rural Housing Community Facilities Program offers direct and guaranteed loans and grants designed to finance and facilitate the development of over 80 different types of essential community facilities serving rural areas. These facilities include, but are not limited to, hospitals, elderly care facilities, child care centers, fire and rescue stations, vocational and medical rehabilitation centers, schools, and public transportation infrastructure. Community Facilities Direct Loan Program: The Rural Housing Service makes direct loans to nonprofit and public entities for the construction of essential facilities. Most loans are made at below-market interest rates and are aimed at serving financially challenged rural areas. Allowed expenses include purchase of land needed for construction of the facility, necessary professional fees, and equipment and operating costs. Community Facilities Guaranteed Loan Program: Through this program, the Rural Housing Service guarantees up to 90 percent of the amount of a loan from a private lender to a public or nonprofit entity to be used for the construction of an essential community facility. Many community borrowers in the Community Facilities Guaranteed Loan Program are able to leverage loan guarantees with funds from private, state, and local sources. Community Facilities Grant Program: The Community Facilities Grant Program is typically used to fund projects under special initiatives, such as Native American community development efforts; child care centers linked with the Federal government's Welfare-to-Work initiative; Federally-designated Enterprise and Champion Communities. Rural Business Programs: Even though Rural Development business programs normally do not have disaster assistance authority, numerous business programs can be of assistance in providing financial relief to small businesses as a result of natural disasters. For additional information on business assistance visit: http://www.rurdev.usda.gov/rbs/busp/bpdir.htm

Final Issue on USDA

Make sure you get to know USDA personnel in your home and surrounding counties.

FSA and other Service Centers can be found at http://oip.usda.gov/scripts/ndisapi.dll/oip_agency/index?state=va&agency=fsa

Taxes

Farmers have a number of options that apply to tax management strategies regardless of the weather or disaster declarations. Farmers should never loose sight of the overall objective of tax management for their farm business. The first objective is to make sound decisions to improve the long-term survivable and profitability of their farm businesses. The second objective is to use the tax management tools to level out the year-to-year swings in reported income and subsequent taxes paid. The multitude of tools and techniques written into the tax code for farmers and all business can be used to manage income and expenses to even out the wide swings in annual profits and losses that many farmers experience in adverse years. These tools allow farmers to take full advantage of allowable deductions, credits, expensing, and income averaging.

Farmers' main objective should be to understand the basic principles behind federal and state taxes in order to 1) keep correct records supporting tax decisions; 2) correctly select a tax professionals that have the skills to assist them in taking full advantage of all allowable deductions, credits, expensing, and income averaging tax; 3) know the correct questions to ask and when to seek timely advice to from professionals to help make advantageous tax management decisions.

VCE's Farm Business Management agents conduct tax update sessions for farmers and small business managers each fall. Be sure to schedule a session in your area to keep farmers up to date on changes in tax law.

Casualty Loss: Natural disasters (drought, floods, hurricanes,) often results in property damaged, destroyed, or lost. A casualty loss may be deducted in some cases by filing form 4684. In general, the amount deducted cannot exceed the basis in the property lost less any reimbursements (insurance or other) received. Therefore, a cow raised from birth, corn in a silo, or a fully depreciated tractor lost in a flood would not be claimed as a loss, because the associated expenses were deducted annually as farm expenses. In the case of a partially depreciated tractor or cow (purchased for breeding purposes) lost in a flood, the remaining book value less any reimbursements received could be claimed as a casualty loss.

Farm Income Averaging: Farmers, meeting all requirements, may be able to average all or some of their farm income by allocating it to the three prior years (base years). This method may result in a lower tax if income from farming is high and taxable income from one or more of the three prior years is low. Farmers must meet ALL eligibility requirements and complete a Schedule J (Form 1040).

Weather-Related Sales of Livestock (from George F. Patrick. "Tax Planning and Management Considerations for Farmers in 2002." Cooperative Extension Service Paper No. CES-347 December 2002. http://www.agecon.purdue.edu/extension/pubs/taxplanning.asp

Two provisions in tax law attempt to cushion producers from the consequences of the weather-related sales of livestock. Livestock held for draft, breeding, or dairy purposes and sold because of weather-related conditions are provided with a two-year reinvestment period under I.R.C. Section 1033(e). The second provision, I.R.C. Section 451(e), which applies to all livestock (other than poultry), allows cash basis taxpayers whose primary trade or business is farming a deferral of receipts from sales in excess of normal business practice because of weather-related conditions resulting in a disaster area declaration. Both provisions apply only to those sales that are in excess of normal business practice of the producer.

Sale with Replacement

The gain on the weather-forced sale of livestock held for draft, breeding, or dairy (not sporting) purposes does not need to be reported as income if the proceeds will be used to buy replacement livestock within two years after the end of the tax year of the year of sale. Although declaration of a disaster area is not necessary, a producer must be able to show that weather-related conditions forced the sale of more livestock than would normally be sold. For example, a beef producer who normally sells 5 cows per year may sell 20 cows in 2002 because of limited feed supplies. Gains from the sale of the extra 15 cows would not be reported as income if the producer purchases at least 15 replacement animals before the end of 2004. The new livestock must be used for the same purpose as the livestock that were sold, i.e. beef cows must be replaced with beef cows.

A producer's tax basis in the replacement livestock will be equal to the basis in the livestock sold plus any additional amount invested in the replacement livestock that exceeds the proceeds from the sale. For example, a producer sells 20 raised beef cows (with a $0 tax basis) for $500 each. The gain of $7,500 (15 cows sold in excess of normal business practice times $500) is deferred. If the producer purchased 15 cows in 2004 for $600 each, the tax basis in the replacement animals would be $100 (the $600 cost minus the $500 proceeds from sale).

To make the election under Section 1033(e) to defer recognition of gain, a producer does not report the gain but attaches a statement to the current year's tax return. The statement shows the following:

  1. Evidence of weather-related conditions that forced the sale of the livestock.
  2. Computation of the amount of gain realized on the sale.
  3. The number and kind of livestock sold.
  4. The number and kind of livestock that would have been sold as normal business practice without the weather-related sales.

If a producer spends $7,500 and buys 15 cows before the end of 2004, the basis of the replacement animals will be $0, the same as the raised cows sold. If the producer spends less than $7,500 on the 15 replacement animals, the difference between what was spent and $7,500 must be reported as 2002 income. If fewer than 15 replacement cows are purchased, the gain from the animals not replaced must be reported as 2002 income, regardless of the cost of the replacement animals. When filing an amended 2002 return, the producer will be subject to additional tax and interest on the tax.

Sale without Replacement (from George F. Patrick. "Tax Planning and Management Considerations for Farmers in 2002." Cooperative Extension Service Paper No. CES-347 December 2002. http://www.agecon.purdue.edu/extension/pubs/taxplanning.asp

Producers who are forced to sell livestock because of weather-related conditions may be eligible for an exception to the rule that the sale proceeds must be reported as income in the year they are received. This exception allows postponement of reporting these receipts as income for one year for both income and self-employment tax purposes. To qualify, an area that affects the livestock must have been declared a disaster area. The animals do not need to have been located in the disaster area and can have been sold before or after the disaster area declaration. However, only the livestock sales in excess of normal business practice qualify for deferral. A declaration must be attached to the tax return for the year in which the weather-related sale occurred. To make the election, the statement should include the following:

  1. A declaration that the election is being made under Section 451(e).
  2. Description of the weather conditions that forced the early sale on the livestock and when the area was declared a disaster area.
  3. A statement explaining the relationship between the disaster area and early sale.
  4. The total number of animals sold in each of the three preceding years.
  5. The number of animals that would have been sold as normal business practice if the weather-related condition had not occurred.
  6. Total number of animals sold and the number sold because of the weather-related event during the tax year.
  7. Computation of the amount of income (see calculation below) to be deferred for each classification of livestock.

For example, a producer normally farrows and feeds 2,000 pigs per year. However, because of drought that caused the area in which the farm is located to be declared a disaster area, the farmer sells 1,000 pigs as feeder pigs in 2002 rather than feeding them and selling them as market hogs in 2003. Under normal practice, no feeder pigs would be sold, so the proceeds from the sale of the 1,000 head ($35 per head X 1,000 feeder pigs = $35,000) can be deferred until 2003.

Crop Insurance and Disaster Assistance Payments
For farmers who use cash accounting, an exception to the general rule is that payments must be reported in the year in which they are received. This exception applies to crop insurance indemnity payments received when crops cannot be planted (prevented planting) or are damaged or destroyed by a natural disaster such as drought or a flood. This exception does not apply where the insurance indemnity is due to a low price for the commodity, such as could occur with the Crop Revenue Coverage (CRC) or Revenue Assurance (RA) programs. Government crop disaster assistance payments are treated the same as crop insurance indemnity payments. The livestock emergency assistance payments of $18 per beef cow, $31.50 per dairy cow, and $4.50 per sheep are not eligible for deferral and must be reported as income in the year received.

The exception allows farmers to postpone reporting such crop-related payments by one year for both income and self-employment tax purposes. To qualify for the exception, a farmer must be able to show that the income from a substantial portion of the crop (generally considered as 50 percent or more) for which payment has been received would normally have been reported in a year following the receipt of payment.

If farmers who qualify for this exception have the option of reporting the income in the year in which it is received. Alternatively, they can elect to defer reporting the payments as income until the following year. One election to postpone the reporting of the payments as income covers all crops from a single farm business. For example, a producer cannot postpone the reporting the payment received for corn unless reporting of the payment for soybeans is also postponed. However, separate elections can be made for each separate farming business.

To make the election under Section 451(d), a statement is attached to the tax return that includes

  1. The name and address of the producer.
  2. A declaration that an election is being made under Section 451(d).
  3. Identification of the crop or crops damaged or destroyed.
  4. A declaration that under normal business practice the income from the crops that were destroyed or damaged would have been included in gross income in a year following the year of damage or destruction.
  5. The cause of destruction or damage of the crops and dates when the destruction or damage occurred.
  6. The total amount of payments received, itemized with respect to each crop and each date when payment was received.
  7. The names(s) of the insurance companies or federal agencies from which payments were received.

Typically, the insurance company deducts the producer's insurance premium from the indemnity payment, and the farmer receives the net proceeds. The gross proceeds of the claim are to be reported as farm income and may be eligible for deferral. The insurance premium is paid and is deductible in the year of loss.

Summary
To quote somebody, "disasters happen." When they do, there are sources of financial help and information to help get farmers back in business. To gain access to a large amount of this help requires that counties be designated a disaster areas. Once this designation happens, USDA is the lead agency in taking applications, determining eligibility, and finally providing the needed funds.

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