Understanding Farm Credit Patronage Dividends
Farmers and ranchers work hard to earn a living from their agricultural activities. They often need financing to purchase equipment, livestock, and other inputs required to maintain their operations. Farm Credit is a nationwide network of cooperatives that provides loans and financial services to farmers, ranchers, and rural communities. One of the unique features of Farm Credit is that it operates as a cooperative, which means that its members are also its owners. As a result, when a farmer or rancher borrows money from Farm Credit, they become a member and have the opportunity to share in the profits of the cooperative through patronage dividends.
Patronage dividends are payments made by a cooperative to its members based on their use of the cooperative’s services or products. In the case of Farm Credit, patronage dividends are based on the interest paid on loans by the cooperative’s members. The more interest a member pays, the more patronage dividends they are eligible to receive.
The Taxation of Patronage Dividends
One of the benefits of patronage dividends is that they are generally considered to be a return of the cooperative’s profits to its members and are therefore not taxable as income. However, there are some important exceptions to this general rule.
First, if a patronage dividend is paid in cash, it is generally taxable as income. This is because cash dividends are considered to be a direct payment of profits to the member, rather than a return of profits in the form of discounted loan interest. If a cooperative pays a cash dividend to a member, the member will receive a 1099-PATR form from the cooperative, which will report the amount of the dividend as taxable income.
Second, if a patronage dividend is based on the cooperative’s profits from non-member business, it is taxable as income. For example, if a cooperative operates a retail store that sells products to both members and non-members, the profits from sales to non-members would be subject to income tax. If the cooperative then pays a patronage dividend based on those profits, the dividend would also be subject to income tax.
The Taxation of Farm Credit Patronage Dividends
Farm Credit offers several types of patronage dividends, including cash, qualified written notices of allocation (QWNAs), and non-qualified written notices of allocation (NQWNAs). The tax treatment of each type of dividend varies.
Cash dividends paid by Farm Credit are generally taxable as income. The cooperative will issue a 1099-PATR form to the member, reporting the amount of the dividend as taxable income.
QWNAs are a type of deferred dividend that allows the cooperative to retain some of its profits and reinvest them in the business. QWNAs are not taxable in the year they are allocated, but they are taxable when they are redeemed by the member. When a QWNA is redeemed, the cooperative will issue a 1099-PATR form to the member, reporting the amount of the dividend as taxable income.
NQWNAs are another type of deferred dividend that are not taxable when they are allocated, but are taxable when they are redeemed. However, NQWNAs are not eligible for the same tax benefits as QWNAs, and the amount of the dividend is subject to a 20% withholding tax. The cooperative will issue a 1099-PATR form to the member, reporting the amount of the dividend as taxable income.
Conclusion
In conclusion, Farm Credit patronage dividends can be an important source of income for farmers and ranchers. While most patronage dividends are not taxable as income, there are some important exceptions, including cash dividends and dividends based on non-member business. Farmers and ranchers who receive patronage dividends from Farm Credit should consult with their tax advisor to ensure that they are properly reporting their income and taking advantage of any available tax benefits.
References
- Farm Credit: Patronage Dividends, https://www.farmcredit.com/resources/patronage-dividends
- IRS: Patronage Dividends, https://www.irs.gov/businesses/small-businesses-self-employed/patronage-dividends
- IRS: Taxation of Patronage Dividends, https://www.irs.gov/publications/p525#en_US_2019_publink1000229424