Although the federal government supported co-ops, some read the Sherman Act to say co-ops violate antitrust laws. After much lobbying, Congress passed the Capper-Volstead Act, which authorized farmers to market and process their produce collectively.
Here are a few interesting facts that are not widely known: Cooperatives have played a role in the civil rights movement. The Federation of Southern Cooperatives helped black farmers gain access to markets and supplies in the segregated South. Today, large cooperatives play a role in influencing domestic and foreign agricultural policies.
I will not go into cooperative taxes because that would be a very long article. But I will address some tax issues affecting co-op customers. I’ve been doing taxes for 22 years and have seen a lot of people misreport co-op payments. When people ask me for advice, I tell them to call the cooperative if in doubt. Most of the time they will know the correct tax treatment or tell you the type of dividend they are paying.
Cooperatives can give donations in cash and in kind to the benefactor. “Qualifying” distributions allow the cooperative to deduct both cash and in-kind contributions, thereby reducing the cooperative’s taxable income. The patron, in turn, must recognize both the cash and the non-cash portion as income. In return, the patron is treated as if he had received cash and reinvested it in the cooperative. This increases the equity base in the cooperative. If the cooperative redeems equity in the future, the amount received by the patron is tax-free. Essentially, you pay the tax upfront, and the refund is tax-free.
“Not Qualified” do not meet the requirements to qualify, typically because less than 20% of the total distribution was paid in cash. The cooperative cannot deduct the monetary donation from the patron, and the patron does not count it as taxable income. In future disbursements of the non-qualified equity, the cooperative receives a deduction, which is recognized by the patron as taxable income.
Which one is better? It depends. Many people like that with unqualified, the amount of money received is the amount of income you recognize. For example, you receive $20 in cash and $80 in equity. If you qualify, you would recognize $100 in taxable income while receiving only $20 in cash. In the non-qualifying case, you would only recognize $20 in cash and the remaining $80 would be credited if Patronage Equity is distributed at a later date. However, some patrons like the fact that they have a tax-free payout in the future. There is also the issue of the transit allowance for domestic production activities (DPAD). Co-ops that issue non-qualified distributions may have an advantage by passing more DPAD on to customers.
This is a very complex area of tax law. Speak to your accountant or call your cooperative if you have questions about your patronage.
DTN tax columnist Rod Mauszycki, JD, MBT, is director of tax at CLA (CliftonLarsonAllen) in Minneapolis, Minnesota. Read Rod’s Ask the Taxman column at https://www.dtnpf.com/…the-taxman. You can email Rod at [email protected]
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