News

Cooperatives and Current Year Earnings

By: Dennis Gardiner, Partner email

What are you going to do with this year’s earnings?

We continue to have discussions, at all levels, with our cooperative clients on how to handle current year earnings. We have been attempting to have these discussions long before fiscal year-ends so that management has some direction from the board on how they would like to see it handled.

We have been laying out some of the options available to cooperatives at the end of the year. These include:

• Qualified patronage allocations

• Non-qualified patronage allocations

• Keeping or allocating the benefits of Section 199

• Using bonus depreciation, or not.

Any one, or any combination of these, can be used at year-end to distribute earnings or to mitigate tax liabilities. In fact, the number of options can be confusing, and require analysis as to the impact on current and future year decisions.

Our main focus has been the built-up retained earnings that so many of our cooperative clients have. As we have asked before, how much is too much? Unfortunately, we have not answered that question yet. Obviously, every coop is going to be different.

The dilemma is that Section 199 and bonus depreciation are effective ways to mitigate taxes, but they tilt the imbalance in member’s equity further towards retained earnings. We are trying to address this with our coop clients so that decisions are made with an understanding of how they affect members in the current and future years.

Furthermore, we are exploring ways to address one of the central concerns we have heard, which is, “what happens if the coop were to be sold, or some company were to come in to try to buy the coop?” The solution to this may take revisiting articles of incorporation and by-laws, working with legal counsel and analyzing how retained earnings has grown to today’s levels.

Please contact us at your convenience to discuss what options your coop has, how to present the choices the board will have at year-end, and the effects of those choices.