Publication 225 |
2000 Tax Year |
Income From Cooperatives
If you buy farm supplies through a cooperative, you may receive
income from the cooperative in the form of patronage dividends. If you
sell your farm products through a cooperative, you may receive either
patronage dividends or a per-unit retain certificate, explained later,
from the cooperative.
Form 1099-PATR.
The cooperative will report the income to you on Form
1099-PATR or a similar form and send a copy to the IRS. Form
1099-PATR may also show an alternative minimum tax adjustment
that you must include if you are required to file Form 6251,
Alternative Minimum Tax--Individuals. For information
on the alternative minimum tax, see chapter 14.
Patronage Dividends
You generally report patronage dividends as income on lines 5a and
5b of Schedule F for the tax year you receive them. They include the
following items.
- Money paid as a patronage dividend.
- The stated dollar value of qualified written notices of
allocation.
- The fair market value of other property.
Do not report as income any patronage dividend that
is a nonqualified notice of allocation, that is for purchasing or
selling capital assets or depreciable property, or that is for
purchasing personal items.
If you cannot determine what the dividend is for, report it as
ordinary income.
Qualified written notice of allocation.
If you receive a qualified written notice of allocation as part of
a patronage dividend, you must generally include its stated dollar
value in your income in the year you receive it. A written notice of
allocation is qualified if at least 20% of the patronage dividend is
paid in money or by qualified check and either of the following
conditions is met.
- The notice must be redeemable in cash for at least 90 days
after it is issued, and you must have received a written notice of
your right of redemption at the same time as the written notice of
allocation.
- You must have agreed to include the stated dollar value in
income in the year you receive the notice by doing one of the
following.
- Signing and giving a written agreement to the
cooperative.
- Getting or keeping membership in the cooperative after it
adopted a bylaw providing that membership constitutes agreement. The
cooperative must notify you in writing of this bylaw and give you a
copy.
- Endorsing and cashing a qualified check paid as part of the
same patronage dividend. You must cash the check by the 90th day after
the close of the payment period for the cooperative's tax year for
which the patronage dividend was paid.
Qualified check.
A qualified check is any instrument that is redeemable in money and
meets both of the following requirements.
- It is part of a patronage dividend that also includes a
qualified written notice of allocation for which you met condition
(2)(c), above.
- It is imprinted with a statement that endorsing and cashing
it constitutes the payee's consent to include in income the stated
dollar value of any written notices of allocation paid as part of the
same patronage dividend.
Loss on redemption.
You can deduct in Part II of Schedule F any loss incurred on the
redemption of a qualified written notice of allocation you received in
the ordinary course of your farming business. The loss is the
difference between the stated dollar amount of the qualified written
notice you included in income and the amount you received when you
redeemed it.
Nonqualified notice of allocation.
Do not include the stated dollar value of any nonqualified notice
of allocation in income when you receive it. Your basis in the notice
is zero. You must include in income for the tax year of disposition
any amount you receive from its sale, redemption, or other
disposition. Report that amount, up to the stated dollar value of the
notice, as ordinary income in Part I of Schedule F. However, do
not include that amount in your income if the notice
resulted from purchasing or selling capital assets or depreciable
property or from purchasing personal items, as explained in the
following discussions.
If the amount you receive is more than the stated dollar value of
the notice, report the excess as the type of income it represents. For
example, if it represents interest income, report it on your return as
interest.
Purchasing or selling capital assets or depreciable property.
Do not include in income patronage dividends from the purchase of
capital assets or depreciable property used in your business. You
must, however, reduce the basis of these assets by the dividends. This
reduction is taken into account as of the first day of the tax year in
which the dividends are received. If the dividends are more than your
unrecovered basis, include the difference as ordinary income on
Schedule F for the tax year you receive them. Include all these
dividends on line 5a of Schedule F, but include only the taxable part
on line 5b.
This rule and the exceptions explained later also apply to amounts
you receive from the sale, redemption, or other disposition of a
nonqualified notice of allocation that resulted from purchasing or
selling capital assets or depreciable property.
Example.
On July 1, 1999, Mr. Brown, a patron of a cooperative association,
bought a machine for his dairy farm business from the association for
$2,900. The machine has a life of 7 years under MACRS (as provided in
the Table of Class Lives and Recovery Periods in
Appendix B of Publication 946).
Mr. Brown files his return
on a calendar year basis. For 1999, he claimed a depreciation
deduction of $311, using the 10.71% depreciation rate from the 150%
declining balance, half-year convention table (shown in Table
A-14 in Appendix A of Publication 946).
On July 1, 2000,
the cooperative association paid Mr. Brown a $300 cash patronage
dividend for his purchase of the machine. Mr. Brown adjusts the basis
of the machine and figures his depreciation deduction for 2000 (and
later years) as follows.
Cost of machine on July 1, 1999 |
$2,900 |
Minus: |
1999 depreciation |
$311 |
| 2000 cash dividend |
300 |
611 |
Adjusted basis for depreciation for 2000: |
$2,289 |
Depreciation rate: 1 x 6 1/2
(remaining recovery period as of 1/1/00) = 15.38% x 1.5 =
23.07% |
Depreciation deduction for 2000
($2,289 x 23.07%) |
$528 |
Exceptions.
If the dividends are for purchasing or selling capital assets or
depreciable property you did not own at any time during the year you
received the dividends, you must include them as ordinary income on
Schedule F unless one of the following rules applies.
- If the dividends relate to a capital asset you held for more
than 1 year for which a loss was or would have been deductible, treat
them as gain from the sale or exchange of a capital asset held for
more than 1 year.
- If the dividends relate to a capital asset for which a loss
was not or would not have been deductible, do not report them as
income (ordinary or capital gain).
If the dividends are for selling capital assets or depreciable
property during the year you received the dividends, treat them as an
additional amount received on the sale.
Personal purchases.
Omit from the taxable amount of patronage dividends on line 5b of
Schedule F any dividends from buying personal, living, or family
items, such as supplies, equipment, or services not related to the
production of farm income. This rule also applies to amounts you
receive from the sale, redemption, or other disposition of a
nonqualified written notice of allocation resulting from these
purchases.
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 made to you by
the cooperative. A per-unit retain allocation is an amount paid to
patrons for products sold for them that is fixed without regard to the
net earnings of the cooperative. These allocations can be paid in
money, other property, or qualified certificates.
Per-unit retain certificates issued by a cooperative generally
receive the same tax treatment as patronage dividends, discussed
earlier.
Qualified certificates.
Qualified per-unit retain certificates are those issued to patrons
who have agreed to include the stated dollar amount of these
certificates in income in the year of receipt. The agreement may be
made in writing or by getting or keeping membership in a cooperative
whose bylaws or charter state that membership constitutes agreement.
If you receive qualified per-unit retain certificates, include the
stated dollar amount of the certificates in income in Part I of
Schedule F for the tax year you receive them.
Nonqualified certificates.
Do not include the stated dollar value of a nonqualified
certificate in income when you receive it. Your basis in the
certificate is zero. You must include in income any amount you receive
from its sale, redemption, or other disposition. Report the amount you
receive from the disposition as ordinary income in Part I of Schedule
F for the tax year of disposition.
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