Form 1099-PATR: Taxable Distributions Received From Cooperatives

A Form 1099-PATR: Taxable Distributions Received From Cooperatives in the United States reports the figures a taxpayer must declare so the correct liability can be assessed.

Cooperatives operate on a fundamentally different tax model than regular corporations. Under Subchapter T, a cooperative can deduct patronage dividends paid to members from its own taxable income, provided the distributions are made pursuant to a preexisting obligation based on the quantity or value of business done with the cooperative. The members then include these patronage dividends in their own gross income, ensuring the income is taxed once at the member level rather than at both the corporate and individual levels.

Patronage dividends may be paid in cash, qualified written notices of allocation, or other property. Under IRC Section 1385(a), qualified written notices of allocation are includible in the member's income in the year received, provided the cooperative pays at least 20% of the patronage dividend in cash and the member has consented to include the notices in income. Nonqualified written notices are not taxable when received but become taxable when redeemed or disposed of by the member. Form 1099-PATR also reports per-unit retain allocations, which are amounts paid to members based on the unit quantity of products marketed or purchased through the cooperative, and alternative minimum tax items related to cooperative distributions.

Form 1099-PATR is issued to members of cooperatives whenever the cooperative distributes patronage dividends or other allocations of $10 or more during the tax year. Agricultural cooperatives are the most common filers, distributing patronage dividends to farmers based on the volume of grain, livestock, dairy, or other agricultural products the farmer marketed through the cooperative. These distributions may include cash payments, retained patronage allocations (equity credits), and per-unit retain certificates.

Consumer cooperatives (such as food co-ops, credit unions, rural electric cooperatives, and telephone cooperatives) also file Form 1099-PATR when they distribute patronage dividends to members based on purchases made through the cooperative. Worker cooperatives distribute patronage dividends based on labor performed. Housing cooperatives may distribute refunds of excess charges collected from members. Purchasing cooperatives that serve businesses distribute patronage dividends based on the volume of supplies or inventory purchased through the cooperative.

Members who receive Form 1099-PATR generally report patronage dividends as business income on the appropriate schedule. Farmers report agricultural cooperative distributions on Schedule F, while other business members report on Schedule C. Patronage dividends related to personal, nonbusiness purchases are reported as other income on Schedule 1 only if they exceed the member's adjusted basis in the items purchased. Under the Tax Cuts and Jobs Act, qualified patronage dividends from cooperatives organized under Subchapter T may qualify for the IRC Section 199A(g) deduction, providing a significant tax benefit to agricultural cooperative members. The cooperative reports the member's share of the Section 199A(g) deduction in Box 6 of Form 1099-PATR.

Form 1099-PATR uses multiple boxes to report different types of cooperative distributions and related tax items. Box 1 reports patronage dividends, which are the primary distribution based on the member's volume of business with the cooperative. This is the amount distributed from the cooperative's net earnings attributable to business done with members (patronage-source income) as opposed to nonmember business.

Box 2 reports nonpatronage distributions, which come from the cooperative's income derived from sources other than business with its members, such as investment income or nonmember sales. Unlike patronage dividends, the cooperative cannot deduct nonpatronage distributions, meaning this income may have already been taxed at the cooperative level. Box 3 reports per-unit retain allocations paid in qualified certificates, representing amounts retained by the cooperative based on the quantity of products the member marketed through or purchased from the cooperative.

Box 4 reports federal income tax withheld through backup withholding. Box 5 reports the redemption amount of nonqualified written notices of allocation and nonqualified per-unit retain allocations that were redeemed during the year, which become taxable to the member upon redemption under IRC Section 1385(c). Box 6 reports the Section 199A(g) deduction amount, representing the member's share of the qualified cooperative's deduction for qualified domestic production activities, which the member takes as a separate deduction. Box 7 reports the qualified payments amount eligible for the Section 199A(a) qualified business income deduction. Boxes 8 and 9 report the Section 199A(a) SSTB determination and W-2 wages information needed to calculate the QBI deduction limitations. The member integrates all of these figures into their individual return, reporting income on the appropriate business schedule and claiming applicable deductions.