Cooperative income taxes contain many opportunities to structure your operations to reduce or eliminate your tax liability. Whether you are a 990, non-profit, or an 1120 tax paying entity, Kiesling Associates has the experience to deal with your issues.
Some of the common areas that can be technically complex include:
- What is considered patronage and member sourced income?
- How should corporate structures be organized between subsidiaries and their parent owners?
- What should the cooperative's member allocation be to minimize taxes, but maintain reserves?
- What are my notification requirements to our members?
The answers to these questions can make significant differences in your ultimate tax liability. If you have questions related to your cooperative taxes please contact us at firstname.lastname@example.org.
What is considered patronage and member sourced income?
The criteria for being considered patronage sourced income is that it must be for the benefit of the members and be allocated to the members. This definition can be interpreted broadly to include many items from local services revenues to one-time gains on sales of certain investments.
How should corporate structures be organized between subsidiaries and their parent owners?
There are options when structuring the corporate umbrella to create subsidiaries for legal or other regulatory reasons while still taking advantage of cooperative benefits. Whether it is using Limited Lliability Companies (LLC) or following tax rulings allowing certain subsidiary activities to be included in the cooperative pool, a company will have choices. There will also be decisions to be made on the projected short and long-term profits of the services a subsidiary might provide. Depending on the profit or loss of a business segment, total taxes from patronage and non-patronage sources can be minimized.
What should the cooperative's member allocation be to minimize taxes, but maintain reserves?
Generally, a cooperative should allocate as much of its member net margins as allowable within the by-laws. Certain reserves can be maintained for future needs, but excess reserves can result in loss of cooperative status. Cooperatives have discretion on when historical allocations will be retired making it more of a reasonable decision to a allocate a large portion of the margins from member services.
What are my notification requirements to our members?
When the allocation is made, the members should be notified through a mailing as to the amount they have in their patronage account. This notification should be done before the tax return is filed to document the cooperative deduction taken. When payment is made, only certain members need to have a 1099-MISC mailed to them depending on the type of entity they are.