Non-Member Business Versus Non-Patronage Business
Dennis Gardiner, CPA, Managing Partner
In reviewing the patronage allocations for a number of our clients, I noted plenty of non-member business in certain divisions of the cooperative. Grain and agronomy have higher member business percentages, while feed and energy are typically the lower member business percentages. Feed is usually a function of business done with integrators; energy is most often more retail or home heat with non-members.
Non-patronage sourced income is taxable to the cooperative; and patronage sourced income with non-members is also treated as taxable. Non-patronage sourced income is not too clearly defined. IRC
§1.1388-1(f)(3) states if the transaction producing the income or deduction does not actually facilitate the accomplishment of the cooperative's marketing, purchasing, or services activities but merely enhances the overall profitability of the cooperative, being merely incidental to the association's cooperative operation, the income or deduction is from nonpatronage sources. This might include rental income (of premises), interest income, gain on sale of fixed assets and income from investments in securities.
Who are your non-members doing business with the cooperative? Do they not want to buy stock in the co-op, or give consent to include allocations in their taxable income? Would the non-member qualify for membership? Are the non-members not treated as members due to service or sales relationships, or contractual agreements?
It could be worth re-visiting patronage sourced income with non-members. Creating different patronage rates for lesser margin business done with the patrons identified above could allow the cooperative to have higher member business percentages. If integrators/non-members were to qualify as members, you could pay a very small patronage percentage of what regular members receive, say 1/10th, 1/20th, or maybe nothing at all.
The end game is to deem their business to be member business. Higher member business could increase the patronage allocation to members, the Section 199A(g) deduction, impact taxable income and the treatment of net operating losses (NOLs). As it is today, we cannot use Section 199A(g) against non-member business; meaning the portion allocated to non-member business is lost, not used. Net operating losses generated are allocated between member and non-member. Only member income can be used to offset member-related NOL carryforwards; similarly, only non-member income can be used to against non-member NOL carryforwards.
Reach out if you would like us to assist in exploring this approach.