Still not using Non-Qualified Patronage Dividends? – Dennis Gardiner, CPA, Managing Partner

Since DPAD/Section 199, now Section 199A(g), began in 2007, cooperatives have been building up significant increases in retained earnings and permanent capital. Additionally, bonus depreciation has been an available tax deduction for use for many years recently. As these deductions were being used, members have received a lesser percentage of the patronage-sourced (allocable) earnings. Percentages of retained earnings to total equity have blown past 50% to now over 70% in many balance sheets today. Only a handful of our clients have chosen to turn to non-qualified patronage allocations to ensure more equity of the cooperative has a member’s name on it.

Non-qualified patronage dividends are noncash patronage allocations. The cooperative must include the face amount of the non-qualified allocation in its taxable income in the year of allocation; which is typically mitigated by the use of Section 199 and bonus depreciation. The patron does not recognize any tax consequences related to a non-qualification allocation received. When the non-qualified notices are revolved out or redeemed in cash to the patron, the cooperative will treat this equity redemption as a tax deduction and the patron will report the cash received as taxable income.

Having non-qualified dividends in your members’ equity section not only puts more equity into members’ names, it also gives the cooperative a taxable income management tool. For example, one of our clients was looking to revolve equity this year, and was looking at significant taxable income for the year. They chose to revolve non-qualified patronage dividends, instead of deferred qualified patronage.  The decision allowed the cooperative to take a dollar-for-dollar deduction for the cash paid out; whereas a payment of deferred qualified patronage would not have driven a deduction. This saved the cooperative significant tax dollars in the current year.

Again, non-qualified patronage allocations are both equity and taxable income management tools for your cooperative.  Reach out to us to further understand the value, or use, of non-qualified patronage dividends.