Farmers and ranchers may belong to an agricultural cooperative through which they market their products or purchase their inputs. Agricultural cooperatives generally are either marketing cooperatives such as dairy cooperatives which process and market dairy products of its members or providers of agricultural inputs such as fertilizer, seed, fuel, and chemicals. If the cooperative is profitable in its annual operations, its Board may authorize a cooperative dividend and make a distribution of profits to members based on the amount of business with the cooperative each member conducted during the year. Such a distribution is reported on an IRS Form 1099-PATR, Taxable Distributions Received From Cooperatives, shown below.
Boxes 1, 2, 3, and 5 are of importance and used to correctly calculate the income of the farming or ranching business. These values represent the “pass-through” income from the cooperative to unique members based on the amount of business the member conducted with the cooperative.
Example 1. Ralph operates a dairy. He sells his milk to a cooperative. This year the cooperative reports Ralph’s patronage dividend of $1,000; $300 of which is in cash and $700 of which retained earnings (qualified written notice of allocation) in Box 1. Additionally, the cooperative reports per-unit retains paid in money (PURPIM) in the amount of $5,000. The total taxable amount is $6,000, reported on lines 3a and 3b of Schedule F.
Example 2. Ralph, from the example above, also received $5,500 from the cooperative which was a payment for previously held capital retained earnings which had been credited to Ralph’s account through a qualified written notice of allocation). Because the $5,500 was taxed in the past, this revenue is not taxable in the current year. Ralph’s records should reflect the non-taxable nature of the payment; the cooperative generally issues a notation that the payment is not taxable. A payment for past retained earnings is not reported on a 1099-PATR.
Example 3. Cinda conducts her farming business through a single-member LLC (SMLLC). Because, for income tax purposes the SMLLC is a disregarded entity, Cinda reports all of her farming income on IRS Schedule F. Cinda purchases most of her farming inputs through a cooperative, and she also purchases personal items such as dog food, gasoline, and repairs to her personal car (non-business usage). This year Cinda receives an IRS Form 1099-PATR with $1,500 in Box 1. Per her records, Cinda determines that 15 percent of her patronage dividend reported in Box 1 is allocable to personal item purchases. Therefore, Cinda reports her patronage dividend in the following manner using lines 3a and 3b on Schedule F.
By removing the personal amount of the patronage dividend, Cinda reports only $1,275 on 3b.
Observation: Other values used to calculate the Qualified Business Income Deduction (QBID) are reported on Form 1099-PATR. These items are generally reported on 8995-A. For more information on QBID, please reference IRS Form 1040 Instructions.
The Center for Agricultural Law and Taxation is a partner of the National Agricultural Law Center (NALC) at the University of Arkansas System Division of Agriculture, which serves as the nation’s leading source of agricultural and food law research and information. This material is provided as part of that partnership and is based upon work supported by the National Agricultural Library, Agricultural Research Service, U.S. Department of Agriculture.