Determining the Value in Patronage Allocations
By: Mark Rodruck, CPA, Partner | email
Over the past few years I have heard many different opinions in regard to patronage allocations, ranging the gamut from: "The members don't want to accept patronage allocations," to "Cooperatives must allocate patronage earnings." More specifically, I have hear that members want earnings reinvested for bigger and better facilities, more efficient equipment and the most recent technologies rather than receiving patronage earnings from their local cooperative. Before deciding to dole out patronage allocations or reinvest those earnings, cooperatives must consider the tangible and intangible values that each option holds.
Patronage allocations, one of the defining attributes of cooperatives, return equity to the members of the cooperative. Patronage allocations take different forms such as cash, deferred-qualified allocations and deferred non-qualified allocations, as well as deferred equity and deferred equity retirement. Each of these forms of allocation comes with its own set of challenges and responsibilities, and can hold different values for the cooperative, and the member, depending on what goals are to be achieved.
Receiving a check from a cooperative reminds members why they do business with their local cooperative. It is perhaps the most effective marketing tool that a cooperative has.
To be a qualified allocation, at least 20% of the allocation must be paid in cash, the cooperative must deduct the allocation from its earnings, and the member must include the entire allocation in their taxable income.
Non-qualified allocations are done with deferred equity, where the cooperative does not get a tax deduction for the allocation and the member doesn't include the allocation in their taxable income until the cooperative pays the allocation out in cash.
Deferred equity shifts some of the capital requirements from the cooperative's lender to its members, and deferred equity retirement can be used as a tool to generate goodwill among members and patrons.
In the past few years many cooperatives have been retaining more of their patronage earnings and allocating less to the members. There are many reasons a cooperative may want to do this including, but not limited to; pressure from lenders to increase working capital and the need to increase storage space for grain and fertilizer.
In the end, unfortunately, there is no magic one size fits all answer. Each cooperative must look at their current and future needs to determine which path, in the patronage road, they feel best fits their cooperative and meets the needs of their members.
