Considering Book/Tax Differences in Patronage and Tax Computations
By: Dave Thomsen, CPA, Partner | email
One of the best parts of working with our cooperative clients is helping them with the annual decision of how much of their earnings to allocate back to members as patronage dividends. There are rules to follow in order to protect the ability to deduct the allocation for income tax purposes. Many items come into play, such as: is the cooperative "exempt" or "non-exempt" for tax purposes, will patronage dividends be in the form of "qualified" or "non-qualified" allocations, and is the allocation based on "book" income or "tax" income.
Most of our clients have historically based their patronage dividend allocations on a tax basis, and there are several book/tax differences that can have a big impact on the patronage dividend computation. Some of these differences are temporary while others are permanent, and many of you have seen the significant effect they have had on recent patronage dividend and income tax computations at your cooperative. Several of the more common book/tax differences we work with on an annual basis and how they are handled differently for book and tax purposes are as follows:
| Topic | Book/GAP | Tax |
| Depreciation | Deduct over useful life |
Deduction based on tax tables, Section 179, bonus depreciation |
| Section 199 - DPAD | N/A | Deduct as computed, often limited by wages |
| Inventory capitalization - 263a | N/A | Capital certain purchasing, handling and storage costs |
| Inventory reserves | Deductible when established | Not deductible |
| Bad debt reserves | Deductible when established | Not deductible |
| Meals & entertainment | Deduct in full | 50% deductible |
| Lobbying/political contributions | Deduct in full | Not deductible |
| Accrued salaries, bonuses and vacations | Deduct in full when accrued | Deduct if paid within 2 1/2 months of year end |
| Pension costs | Deduct as paid or accrued per actuarial computations | Deduct as paid |
| Nonqualified allocation issued | Increase in members' Equity | Not deductible until redeemed |
| Nonqualified allocation received | Recognize as income | Income deferred until redeemed |
We will continue to work with you to help you understand the effect of these differences between your audited financial statements and tax return, and the effect they have on your patronage dividend computation. In the meantime, if you have questions or would like to discuss some patronage dividend and income tax planning prior to your year end please let us know.