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Catalyzing worker co-ops & the solidarity economy

The Cooperative Balancing Act – Patronage v. Equity

One of the biggest debates within ag cooperatives is the use of patronage and the balancing act between patron relations, income taxes, and equity management. Patronage can be seen as a marketing tool or a way to avoid income taxes. On the flip side, it can be seen as a strategic concept used to manage equity, current ownership, and the betterment of the facilities to which the producer has access. Some cooperatives pay based on what the maximum amount allowable is, others pay a fixed percentage of income each year, others a flat amount per bushel or in total.

There is nothing wrong with any of the approaches if they do not damage the cooperative from the inside. Often, the answer is to declare as much as possible to pay the least amount of income taxes at the cooperative level. While this sounds like a good idea on the surface, it does not always produce favorable results. To qualify for a tax deduction, the patronage paid in cash must be at least 20% of the total allocation, which generally isn’t enough to cover the income taxes on the total allocation (cash and stock). A coop needs to pay closer to a minimum of 40% cash to cover the tax obligation and more if they want the producer to put some cash in their pocket. With tools such as DPAD/Section 199A(g), cooperatives can build working capital quickly by using the DPAD deduction to offset income for tax purposes and not rely on large patronage allocations to reduce income taxes. Depreciation methods are still favorable with bonus depreciation still available for 80% of the purchase price and Section 179 100% write-off is still an option if total fixed asset acquisitions are less than $2.89 million. The question is not really how much patronage to pay, but how much equity does the cooperative want to or can afford to give up in order to pay patronage. The marketing, income tax, capital investment and equity management factors mentioned above all have to be considered and balanced.

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