Non-Qualified Patronage Allocations
By: Dave Thomsen, Partner | email
While this year brought success for some, most of you missed an opportunity to utilize non-qualified patronage allocations. I use the term “missed” because making a non-qualified allocation with a cooperative that hasn’t utilized or discussed such allocation in advance, is difficult to do at the audit board meeting.
I encourage all of you to consider non-qualified allocations. Many of our cooperative clients, particularly the larger ones, have built significant retained (un-named) equities. Non-qualified allocations are essentially no different than retained earnings, except that they are not due to the patrons and therefore do not fall into your typical equity revolvement schedule. However, in the year the allocation is made to the patrons, the cooperative takes the tax deduction for 100% of the cash payment made, and the patrons report the payment as taxable income.
The non-qualified allocation can therefore be either a source of permanent capital, or a means of returning equity to patrons. For example, if you had held back allocations to patrons in past due to the advantage of a tax deduction, the reason for the diminished amount you were able to allocate at the time, you may in the following year(s) “make up” for that held-back amount and return that equity to the patrons.
Some cooperatives may find they can use non-qualified notices effectively in responding to various income and tax situations, including extraordinary occurrences such as losses. By including authorization for issuing both qualified and non-qualified notices in its bylaws, a cooperative can decide on a yearly basis whether to issue non-qualified notices, and when to time their redemption, based on income and tax considerations.
Contact your GT Professional to discuss how to utilize non-qualified allocations.