Legal Basis of Tax Exemption of Cooperatives

Cooperatives according to § 521 are a more restrictive form of cooperative, which must meet certain requirements. The main tax advantage of Section 521 is that these cooperatives can deduct patronage dividends paid to non-members and deduct dividends paid on share capital. In the past, most agricultural cooperatives distributed patronage in combination of species and qualified actions. This is due to the historical situation where producers were subject to low tax rates while the corporate tax rate was much higher. It therefore made sense to immediately transfer the tax at the user`s lower tax rate, rather than deferring payment of the tax to the co-op until the equity is withdrawn. The Tax Cuts and Employment Act 2017 significantly reduced corporate tax from a maximum of 37% to a flat rate of 21%. As a result, co-operatives had lower tax rates than most of their clients. I conducted extensive research and simulations with the co-operatives represented and illustrated how unskilled distribution maximizes the co-op member`s return on investment. At the request of the National Council of Peasant Cooperatives, our academic group of cooperative specialists organized national workshops and webinars on this topic. These efforts resulted in a national award from the American Agricultural Economics Association for an outstanding group expansion program. Currently, we are seeing increased interest in unskilled distributions and more and more agricultural cooperatives are turning to unskilled distributions. A co-operative under section 521 must also keep records of favouritism and equity and must not maintain excessive financial reserves (unallocated equity).

Section 521 co-operatives are often exempt from SEC securities registration laws. For this reason, many closed next-generation co-operatives choose to organize as Section 521 co-operatives. Under the closed cooperative model, they had no non-member businesses and 100% of their members did business every year, so they struggled to comply with Section 521 restrictions. It is interesting to note that many of the requirements of section 521 appear to relate to the Rochdale principles. The principle of cooperative taxation under Subchapter T is that the net income of co-operatives is generally taxed at the co-operative level or at the patronage dividend level, but not both. Subchapter T allows co-operatives to deduct certain types of comfort rebates from their taxable income, and it is the vehicle that performs uniform taxation. Co-operatives are taxed at the standard corporate rate on all remaining income, including non-member income, non-patronage dividend income and members` income that is not distributed as patronage dividends. (d) deduction of the amounts allocated from income other than rebates.

The amounts allocated to patrons during the taxation year in respect of their income other than patronage dividends (whether or not the income was earned during that taxation year) may be deducted from the gross income of a cooperative operating in accordance with the requirements of sections 521 and 1.521-1, whether or not the income was earned in that taxation year, that these amounts be paid in cash. Commodities, share capital, revolving fund certificates, hold certificates, promissory notes, letters of advice or other that disclose to each client the dollar amount allocated to him. For that purpose, allocations made after the end of the tax year and no later than the 15th day of the ninth month following the end of the taxation year shall be deemed to have been made on the last day of that tax year to the extent that such allocations are attributable to income received in the taxation year or in the years preceding the taxation year. As used in this paragraph, the term non-patronage income refers to ancillary income from sources not directly related to the cooperative`s marketing, purchasing or service activity. For example, income from the rental of premises, investments in securities, the sale or exchange of fixed assets is income that does not come from patronage. Transactions with the United States are income that does not come from patronage. In order for the deduction to be applicable to income other than the rebate, it is necessary that the amount to be deducted be allocated on the basis of the riscenate in proportion to the amount of the transactions carried out by or for patrons during the period to which that income may be attributed. Thus, if capital gains are realized on the sale or exchange of fixed assets acquired and disposed of during the taxation year, the income from those profits must be allocated to the patrons of that year in proportion to the amount of the transactions carried out by those patrons during the taxation year.

If capital gains are realized by the Association from the sale or exchange of capital property held in more than one fiscal year, the income from such profits shall be apportioned proportionately possible to the patrons of the fiscal years in which the assets were held by the Association and to the amount of transactions made by such patrons in those taxation years. The basic idea of subchapter T and cooperative taxation is that the cooperative is an extension of the patrons who own it. Subchapter T allows a co-operative to deduct certain distributions of net income to members, in addition to deductions for expenses allowed by other businesses. These distributions become taxable income for the member. As a result, net income is taxed only once. In some cases, the tax is immediately transferred to the client and in other cases, the income is taxed at the co-operative level, then the co-operative receives a tax deduction and the member agrees to tax that income in a later period. Profits from non-member transactions may not be distributed under patronage according to the general provisions of the subchapter. Co-operatives pay taxes on non-members` profits and members` retained earnings at the general corporate rate. Subchapter T also contains section 521 of the Code, which describes the requirements for a more restrictive form of cooperative, called a cooperative under section 521. Section 521 co-operatives (discussed in a later section) must distribute profits to non-members, but may also deduct this distribution from non-members` profits. The movement to tax cooperatives on the same basis as for-profit corporations is led by the National Tax Equality Association, Chicago, which claims to represent two million corporations, large and small.

The association argues that the co-operative movement has long grown and can now bear its fair share of the national tax burden. A selection procedure is used to determine the status of a regional cooperative under section 521. The regional co-op must meet the requirements of Section 521 for its producer members, and if it has co-operatives as members, the IRS will verify that those co-operatives meet the requirements of Section 521.