- On the basis of quantity or quality of business done with the patron
- Pursuant to a written obligation in existence before the cooperative received the amounts paid into it by the patron
- Determined by reference to net earnings
In other words, patronage dividends amount of a return of some of the amounts a patron spent with a cooperative. Patronage dividends usually occur with farm cooperative. Any refund and discount to the patron is income.
What is not a patronage dividend?
Patronage dividend does not include the following:
- an amount paid to a patron by a cooperative to the extent that such amount is paid out of earnings not derived from business done with or for patrons
- an amount paid to a patron by a cooperative to the extent that such amount is paid out of earnings from business done with, or for, other patrons to whom no amounts are paid, or to whom smaller amounts are paid, with respect to substantially identical transactions
- that portion of a capital stock dividend that is charged against net earnings from nonmembers business
- an amount paid to a patron by a cooperative to the extent that such amount is paid to redeem instruments other than written notices of allocation
Treatment of patronage dividends by members and patrons
Members of a cooperative association who receive patronage dividends must treat the dividends consistently with the transaction giving rise to the dividend. For example, patronage dividends attributable to the marketing of a product to a member are treated like additional proceeds from sale of the product and are includible in the recipient's income. Likewise, patronage dividends attributable to the purchase of equipment for its members are treated as a reduction in the recipient's basis in the purchased equipment (provided the recipient still owns the equipment).
The exemption for recipients of allocated patronage dividends
With respect to patronage dividends, whether paid in cash or credited to the patron in one form or another, the Treasury has consistently held that the recipients are subject to tax in the same way that other income is taxed. As many cooperatives allocated their earnings to patrons in paper that was far from being the real equivalent of cash, and as the recipients were expected to pay tax on such dividends in actual cash, the unreality of the Treasury's theory that such payments represented immediate reinvestment was evidenced by many protests and much evasion. Nonnegotiable certificates payable at some far distant and indefinite time appeared to farmers and others as anything but cash, and certificates or credits for small amounts were regarded as practically worthless.
In recent years the theory, as it was applied by the Treasury Department, has not stood up under the scrutiny of the courts. They have upheld the more realistic view that such payments, under definitely described conditions, do not meet the test of realization that determines taxable income. Certificates which allocate cooperatives earnings to patrons, but which have no fair market value, were held not to be taxable income to the patrons at the time the certificates were issued. If later they were to acquire a fair market value they would then become taxable income.
Examples of Patronage Dividend
- A farmer-owned cooperative that distributes profits to its members in the form of a patronage dividend.
- A food co-op that gives out patronage dividends to their members based on their membership level and the amount of groceries they purchased over the course of the year.
- A credit union that distributes patronage dividends to its members based on the amount of money they have deposited in the credit union.
- An energy co-op that distributes patronage dividends to its members based on their investment in the co-op.
- A banking co-op that distributes patronage dividends to its members based on the amount of money they have deposited in the bank.
- A renewable energy co-op that distributes patronage dividends to its members based on their investment in renewable energy projects.
- A farmer-owned cooperative that distributes patronage dividends to its members based on their share of the profits from the cooperative's operations.
- An insurance co-op that distributes patronage dividends to its members based on their premiums paid.
Advantages of Patronage Dividend
Patronage Dividend is a payment distributed to cooperative organization members in the form of cash, credits, or other rewards. It is a way of rewarding members for their patronage and loyalty to the cooperative. The following are the advantages of patronage dividends:
- Patronage dividends boost the morale of cooperative members, as they are rewarded for their loyalty and patronage.
- Patronage dividends provide an incentive for members to make increased use of the cooperative’s services.
- Patronage dividends help to build loyalty and long-term relationships between members and the cooperative.
- Patronage dividends provide an additional source of income for members, which can be used for further investment in the cooperative.
- Patronage dividends allow cooperatives to allocate resources more efficiently, as members are rewarded for their patronage.
Limitations of Patronage Dividend
Patronage dividends are a type of financial benefit paid out by cooperative organizations to their patrons; however, there are a few limitations to consider when evaluating the usefulness of these dividends. These limitations include:
- Taxation - Patronage dividends are typically subject to taxation, meaning that patrons may not receive the full amount of their dividend.
- Timing - Unlike other forms of income, patronage dividends may not be paid out on a set schedule. Organizations may decide to pay out these dividends irregularly or even on a delay.
- Amount - The amount of the dividend that patrons receive is determined by the organization and usually depends on the volume of business the patron does with the organization.
- Eligibility - Patronage dividends are generally only available to patrons of the organization, meaning that non-members are not eligible to receive this type of dividend.
- Liquidity - Since patronage dividends are not always paid out on a set schedule, they may not be immediately liquid. This means that patrons may have to wait to receive their dividend or may need to convert it into a liquid asset to access its value.
A Patronage Dividend is an amount paid to a patron by a cooperative organization as a return on their investment or patronage. Other approaches related to patronage dividend include:
- Allocation of Surplus: This approach allows the cooperative to allocate part of its profit to its patrons, based on their patronage. The amount is usually determined by the Board of Directors and is used to reward loyalty and incentivize patronage.
- Capital Credits: This approach involves the allocation of a portion of the cooperative's profits to its patrons as a form of capital credits. This capital is then credited to the patrons' accounts and can be redeemed when they leave the cooperative or in the form of patronage dividends.
- Member Education: This approach involves educating patrons on the benefits of patronage and how to maximize their returns. This can include seminars, workshops, webinars and other educational materials.
In summary, Patronage Dividend is an approach used by cooperatives to reward patronage and incentivize further patronage. Other approaches related to patronage dividend include the allocation of surplus, capital credits and member education.
- P.W. Bernstein 2014, p.204-205
- L.R. Langdon 2002, p.31-32
- Explanation of Miscellaneous Tax Proposals 1990, p.36-37
- United States Congress 2010, p.1602
|Patronage Dividend — recommended articles|
|Contributed Surplus — Residual payment — Debenture Redemption Reserve — Cash earnings — External sources of finance — Issued share capital — Franked Dividend — Capital dividend account — Redeemable shares|
- Bernstein P.W., (2014), EY Tax Guide, John Wiley & Sons, Chicago.
- Explanation of Miscellaneous Tax Proposals, (1990), Government Printing Office, Washington.
- Langdon L.R., (2002), Manual Transmittal, Exempt Farmers Cooperatives, John Wiley & Sons, New York.
- United States Congress, (2010), Hearings, Government Printing Office, Washington.
Author: Karina Stefańska