Patronage dividends are refunds that a cooperative may distribute to its members. These dividends are not considered taxable income and are not included in your gross income. Therefore, you do not need to report them on your tax return. Patronage dividends are typically distributed in the form of cash, stock, or other property. They are often used to reward members for their business with the cooperative.
Agricultural Cooperative Patronage Dividends
Agricultural cooperative patronage dividends (PCDs) are payments to patrons from the net income of the cooperative. PCDs are intended to return excess income to patrons based on how much business they do with the cooperative and increase their tax basis in the stock they hold in the cooperative. PCDs are not taxable income to the patron until they are redeemed.
When PCDs are redeemed, they are reported on the patron’s tax return as follows:
- If the PCDs are redeemed in cash, they are reported as dividend income on the patron’s tax return using Form 1040.
- If the PCDs are redeemed in stock or other property, they are reported as capital gain or loss on the patron’s tax return using Form 1040.
The tax basis of the redeemed PCDs is used to determine the amount of gain or loss to report on the tax return.
The following table summarizes how to report agricultural cooperative patronage dividends on a tax return:
| Type of Redemption | How to Report |
|---|---|
| Cash | Dividend income on Form 1040 |
| Stock or other property | Capital gain or loss on Form 1040 |
Patronage Dividends: Reporting on Taxes
Patronage dividends, a form of cooperative distribution, are typically reported on a Form 1099-PAT issued by the cooperative.
Form 1099-PAT
- Box 1: Patronage dividends, nonqualified written notices, and other distributions on stock
- Box 2: Taxable amount of the distributions
- Box 3: Nontaxable patronage dividends
Note that Box 2 may include amounts from Box 3, which are still taxable even though they are reported as nontaxable on the Form.
Reporting on Tax Return
Patronage dividends are reported on different lines of the tax return based on their type and taxability:
| Type | Line on Tax Return |
|---|---|
| Taxable patronage dividends | Form 1040, Line 6a |
| Nontaxable patronage dividends | Form 1040, Line 6b |
| Qualified written notices | Form 1040, Line 6c |
| Type of Patronage Dividend | Line Number |
|---|---|
| Qualified patronage dividends | 2 |
| Nonqualified patronage dividends | 3 |
Taxability of Patronage Dividends
Patronage dividends are payments made by cooperatives to their members. These dividends represent a portion of the cooperative’s profits that are distributed to members based on their patronage of the cooperative’s business. Patronage dividends are typically taxable as ordinary income, but there are some exceptions.
Exceptions to Taxability
- Patronage dividends paid in qualified written notices of allocation (QWNAs). QWNAs are specific types of patronage dividends that are not taxable until the member redeems them.
- Patronage dividends paid in nonqualified written notices of allocation (NQWNAs). NQWNAs are patronage dividends that are taxable when received. However, members can elect to defer the tax on NQWNAs until the year they are redeemed.
- Patronage dividends paid in cash. Cash patronage dividends are taxable when received.
How to Report Patronage Dividends on Your Taxes
The way you report patronage dividends on your taxes depends on the type of patronage dividend you received.
Type of Patronage Dividend How to Report QWNAs QWNAs are not taxable until you redeem them. You will receive a Form 1099-PATR from the cooperative when you redeem your QWNAs. You will report the amount of the patronage dividend on line 10 of your Form 1040. NQWNAs NQWNAs are taxable when you receive them. However, you can elect to defer the tax on NQWNAs until the year they are redeemed. If you make this election, you will report the amount of the patronage dividend on line 7 of your Form 1040. Cash Cash patronage dividends are taxable when you receive them. You will receive a Form 1099-PATR from the cooperative when you receive a cash patronage dividend. You will report the amount of the patronage dividend on line 10 of your Form 1040. Thanks for taking the time out to read up on patronage dividends and how they affect your taxes. Hopefully you have a better understanding now of this aspect of your tax return. As always, be sure to do your own research and consult with a qualified tax professional if you have any specific questions or concerns. And keep visiting us for more helpful tax info and advice!