Non-qualified Patronage Received from Regional Cooperatives

By Dennis Gardiner, CPA, Managing Partner

We are seeing more use of non-qualified patronage from the regional cooperatives. Treatment of these allocations varies from client to client, firm to firm, etc. Even our decision may change as we see the regional indicate or demonstrate they intend to revolve the non-qualified patronage. For example, CoBank specifically indicates they have no intention of revolving the nonqualified they have issued. Therefore we do not have our cooperative clients record the income and asset associated with the allocation. There are no tax implications, so it becomes a notation in the audited financials at best.

As some of the other regional cooperatives turn to non-qualified patronage as a tool for equity, tax and cash management, we have to make decisions on how to account for those allocations. This affects your financial statements and also your allocations to your members. Again, it depends on whether you are bearish or bullish on the regional cooperative to revolve the non-qualified allocations they make to you, absent any positive indication of their intent. Remember, the financial statements are the responsibility of management (not us); meaning, we may have some clients choose to record the income and asset, and others that will not.

Unfortunately, that is not the end of the dilemma. If you receive a non-qualified patronage allocation from a regional, do you, in turn, allocate it to your patrons in the same year? Or do you just allow that income to become part of retained earnings (undivided savings, reserves, etc.)? If you keep it internally, then it will just become part of permanent capital, which many of you have built up pretty significantly in the past 7–8 years. You could allocate it to the patrons in the year it is revolved (paid to you in cash and becomes taxable). It is then likely to end up going to a different group of members, due to timing.

Thought that was the end of it? Unfortunately, no. If you do allocate the non-qualified allocation you receive to your patrons, you will someday face a revolvement issue. When do you revolve it? When you receive it, when your member passes, or in a normal revolvement cycle? The answer is any of the above. Each coop will probably do it differently. It seems wrong to revolve it if you have not received it from the regional cooperative, but will you be able to segregate it, identify it from other non-qualified you may have or do you even care to? Most of the regional cooperatives members don’t die (coops like yours), but your members do, requiring an estate payout decision.

We will want to engage you in timely discussions. As you see more use of non-qualified patronage allocations from the regional cooperatives, you will want to have a game plan that fits your balance sheet, equity management, cash and tax planning objectives. Just a heads-up as we move into our next cycle of coop audits.