Patronage dividends refers to the cooperative practice of distributing annual earnings to patrons of the cooperative. This distribution normally is only to members of the co-op and reflects each member’s proportion of total member patronage. (For example, a member who provided 1.5 percent of total member patronage will receive 1.5 percent of distributed earnings.) The Internal Revenue Service has specific requirements concerning this distribution of earnings, requirements that if followed will relieve the co-op of any income tax obligation on those earnings. Patronage dividends also are commonly referred to as patronage rebates or patronage distribution.
Articles and Resources
- Patronage dividends change the co-op’s liabilities to members and member-owned assets. Consequently, patronage dividends are reported in the balance sheet, rather than in the income statement. The following article, a balance sheet review by Bruce Mayer, Peg Nolan, and Steve Wolfe, discusses patronage dividends in the context of financial statement best practices: http://www.cooperativegrocer.coop/articles/2011-11-17/accounting-best-practices-balance-sheet
- Co-ops are allowed to retain within the business up to 80 percent of distributed earnings, by allocating that retained portion to individual members’ accounts. This makes retained patronage dividends an important and often-underutilized source of capital for the cooperative – as discussed in this article, by Marilyn Scholl: http://www.cooperativegrocer.coop/articles/2010-06-04/waking-sleeping-giant
- Additional technical details about proper handling of patronage distribution are covered in the following article, by Bruce Mayer: http://www.cooperativegrocer.coop/articles/2009-07-14/patronage-dividends-primer
- The articles just mentioned and additional information were compiled in 2011 into a Patronage Dividend Primer (through a partnership of CDS Consulting Co-op; Triangle Park Creative; and Wegner LLP, CPAs and Consultants). This 36-page publication is available free (a 1.3 Mb pdf).
- A 2008 article by Elizabeth Archerd, “Patronage Refund Systems That Work,” reviewed the transition to patronage dividends at five co-ops: Good Foods Co-op (Lexington, Ky.), Wedge (Minneapolis, Minn.), Three River Market (Knoxville, Tenn.), Outpost (Milwaukee, Wis.), and Onion River (Burlington, Vt.): http://www.cooperativegrocer.coop/articles/2008-12-27/patronage-refund-systems-work.
Patronage dividend payment issues
In the above article, “Patronage Dividend Primer,” Bruce Mayer makes these important points about issuing patronage dividend checks – many of which pertain to the problem of checks that go uncashed by the co-op member:
“The minimum 20 percent paid out portion of a patronage dividend may be in the form of a store certificate that is redeemable in the store for purchases. You must also allow members to ask for cash if they prefer that option. This is much easier than issuing checks and limits the problems with un-cashed checks. Using a certificate also encourages members to use the dividend on groceries and keep the funds in the cooperative.
"Anyone who does not cash a check or use a certificate by the deadline you specify in the written allocation notice gives up his or her claim to the patronage dividend including the non-cash portion. The cooperative will then need to pay tax on the entire patronage allocation to that member. Due to timing and practicality many cooperatives adjust for the unclaimed patronage in the next year, paying the tax at that time.
"Some patrons may deliberately not cash their patronage check/certificate, thinking they are making a contribution to the cooperative. One way to encourage cashing the checks/certificates is to set up a donation fund either to the cooperative or as part of the community contributions program of the cooperative. If the person gives the cash portion back, it is taxable to the cooperative in the next year, but the retained portion of equity would still be held in that member’s name and would not be taxed."
Since the impact of members not cashing their patronage dividend checks is quite negative, food co-ops have discussed how to get a higher rate of check-cashing. Said one manager:
“We attach member notes in the POS for member accounts, so that cashiers can remind members to cash their checks. We re-issue lost checks. We are thinking about calling members during this final week before the expiration date. Are we engaging in the equivalent of doing one's childrens' homework for them?”
Additional details from a different manager:
“We've also facebook posted and tweeted to remind our owners to cash in their rebates by the end of the month. We included a short blurb on the actual rebate that says: "Redemption is good! It is important that you redeem your patronage by April 30, 2012. Otherwise your patronage becomes taxable for the co-op."
Another manager reported:
“We instructed our bank to not accept checks beyond the 180-day mark. It turn out that nearly 25% of our distributed checks were not cashed and it has caused some bookkeeping and tax preparing headaches all around. We are looking at in-store coupons/credits at the registers this year.”
Even patronage dividend checks that are cashed after a bank’s 180-day redemption period do not escape the IRS problems, as one manager commented:
“We just cash the damned checks even if they are "old". The difficulty is, we need to take them back in as taxable income if they don't get cashed in a timely fashion.”
The problem is not easily solved, however. One manager replied to these last suggestions by saying,
“We also tried all of those tactics and still had 25% of the checks go uncashed.”
The best solution may involve the store’s POS system, as described by James Phetteplace of Willy Street Co-op (April 13, 2012):
“If you have an option to set up your POS to disburse patronage rebates during a standard retail transaction, I strongly recommend it. During our FY10 patronage disbursement time period, we were able to get payments out to a very high percentage of our owners. Very little money was left on the table.
“We loaded the rebates into our POS, and when owners gave us their owner #, we gave them a prompt that offered various options for disbursement - use the rebate as a tender type toward the balance of the current transaction, take the rebate as cash, use the rebate at a later date (Those options at the POS are of course dependent on your own bylaws and operational requirements).”
Even the latter methods has additional issues, as explained by Zafra Whitcomb of Belfast Co-op:
“1) We started issuing our dividends on gift cards two years ago and it works great. I wanted to do some kind of credit on our POS system as James has, but Maine state laws prohibit selling alcohol on credit and we decided it would be too confusing for the cashiers. We do reminders in the newsletter, facebook posts and pop-ups on member accounts for unredeemed dividends and still I think we ended up with 10% or so unredeemed - but much better than the 25-50% we have had in some years in the past.
"2) My understanding of the IRS statutes (http://www.fourmilab.ch/ustax/www/t26-A-1-T.html) is that dividends must be issued before the 15th day of the 9th month following the end of the fiscal year (the "payment period"), and endorsed and cashed (or otherwise accepted and redeemed, depending on your distribution method) within 90 days after the end of the payment period, not 90 days after the *dividend* is issued. This means that if you distribute your dividends earlier than the end of the payment period, your members will have more than 90 days to redeem them. As others have said, check with your attorney and/or co-op accountant - assuming they are better informed on these things than you are, which is sometimes not the case...
"3) We used to think that the dividend value reverted to the Co-op at the same time that it became taxable income, but have come to the understanding that the value of the distribution belongs to the member, regardless of when it is redeemed. We cannot void that liability and still have to research how long we have to keep it on our books. Our accountant has allowed us to write off unclaimed distributions after two years in the past, and that roughly aligns with Maine law on honoring the value of gift cards."
The seriousness of dealing with unclaimed checks in a timely manner is reinforced by Kevin Sharp of Ann Arbor People’s Food Co-op (April 13, 2012):
“We hadn't previously made a real concerted effort (some, not a huge push). We have been paying taxes on the value of the uncashed checks but now, according to State law, after 36 months that money must be turned over to the State (the full rebate amount, not just the taxes). We just completed an audit and are faced with paying 47K in uncashed rebate checks to the State of Michigan. We had previously been advised that the money did not need to be turned over. Anyway, it looks like there may be ways around it. We're still looking into those. But, we'd much rather have that money in our members' hands and will make a more concerted effort to get them cashed in the future....Double check those state laws!"