If you operate or work on a farm, when you prepare your tax return, you must understand the tax laws that apply to the various unique income and expenses related to farming. This publication, the fifth in a series of articles on taxes for farmers, focuses on Income from Cooperatives. The previous entries covered Recordkeeping and Accounting, Income from the Sale of Farm Products, Rent Income, and Agricultural Program Payments.
Income from Cooperatives
A cooperative is an organization or business that is owned and run by the members of the organization. The members of the organization share the profits and expenses.
A cooperative may be used in farming for services or production. An agricultural service cooperative refers to one where the members provide services to one another. An agricultural productive cooperative refers to one where the members provide resources used in production to one another, such as farming equipment or land.
When you buy farming supplies through a cooperative, the cooperative may pay you patronage dividends or refunds. Likewise, if you sell the products of your farm to a cooperative, the cooperative may pay you patronage dividends or provide you per-unit retain certificates.
The cooperative will report all income you receive on Form 1099-PATR.
You should report patronage dividends on Schedule F of your tax return. Patronage dividends include:
- Monies paid to you as patronage dividends from a cooperative
- The dollar value of notices of allocation
- The fair market value of other property
You should not report income related to any patronage dividends used on non-deductible expenses, such as capital assets, depreciable property, or the purchase of personal or family items. Personal items include fuel purchased for personal use, local telephone service, and long distance telephone calls. You must reduce the cost basis of these items by the amount of the patronage dividend received.
Qualified Written Notice of Allocation
If you receive a qualified written notice of allocation as part of a patronage dividend, you must include the dollar value in income on Schedule F.
A qualified check is any instrument redeemable for money and that meets both of the following:
- It is part of a patronage dividend that also includes a qualified written notice
- It includes a statement that endorsing or cashing the instruments constitutes the payee consenting to include in income the dollar value of any written notice of allocation paid as part of the same patronage dividend.
Loss on Redemption
You can deduct on Schedule F any loss associated with redemption of a qualified written notice.
Nonqualified Notice of Allocation
You should not include the dollar value of any nonqualified notice of allocation in income at the time you receive it. Rather, you include it in income in the tax year of disposition, and report the income on Schedule F.
Per-Unit Retain Certificates
A per-unit retain certificate is any written notice that shows the stated dollar amount of a per-unit retain allocation given to you by the cooperative. A per-unit retain allocation is an amount paid for products sold on behalf of a cooperative patron, which is at a set price without regard to the net earnings of the cooperative.
Per-unit retain certificates are treated the same as patronage dividends for tax purposes.
Qualified per-unit certificates are those issued to patrons of the cooperative who have agreed to include the dollar amount in income in the year of receipt.
You should not include the dollar value of any nonqualified per-unit retain certificate in income at the time you receive it. Rather, you include it in income in the tax year of disposition, and report the income on Schedule F.
Where can I get additional help with my farming-related tax questions?
If you need help with questions about reporting your farming income and expenses on your tax return or with preparing your tax return, you should speak with a tax attorney. There are tax attorneys who specialize in tax law pertaining to farmers. They will be able to answer all of your tax questions and help prepare and file your tax return for you.
You can speak with a tax attorney by calling the phone number located at the top of this web site or by completing the form below. The first consultation with a tax attorney is free of charge, and all conversations are completely confidential. Therefore, you have every reason to get in touch with a tax attorney today to get the answers and help you need.
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Mark has been a contributor to legal web sites related to bankruptcy, tax, and criminal law since 2011. He has an Accounting degree from Texas A&M University.