1099-PATR RECEIVED BY EMPLOYEE OF COMPANY

Technical topics regarding tax preparation.
#1
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My client received a 1099-PATR from a company he works for. The employees of this company do have some small ownership in the company. I haven't seen too many of these. As an employee/owner of the company, is this income taxable?
Any input is appreciated.
Thanks!
 

#2
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Anyone? :)
 

#3
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Patronage dividends. Generally, patronage dividends you receive in money from a cooperative organization are included in your income.
Do not include in your income patronage dividends you receive on:

--Property bought for your personal use, or

--Capital assets or depreciable property bought for use in your business. But you must reduce the basis (cost) of the items bought. If the dividend is more than the adjusted basis of the assets, you must report the excess as income.

These rules are the same whether the cooperative paying the dividend is a taxable or tax-exempt cooperative.


Anyone know what they mean by property bought for your personal use?
 

#4
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I have some info on them. If you PM me your email, I will forward it to you. I personally have never encountered one.
 

#5
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Patronage dividends are usually given out by cooperatives. Most cooperatives are mutually owned cooperatives. This mutual ownership is a result of "built up" retainage of profits. The patronage is paid back from profit to those who have made purchases.. Some of these dividend are retained for working capital needs and some are paid back as they are considered excess earnings. This coop is owned by those persons who have/are doing business with it.

The cooperative handles various goods.

If a farmer buys feed, fertilizer, or other items used in his farming operation, the patronage paid or retained would be income that he should report ( or reduce the expense)

If a farmer buys some other "personal use" item, such as toys for grandkids Christmas, the portion of his personal vs business purchases of the patronage would not be taxable

If a ordinary person buys some items available at the local coop and these purchases are personal (not business related), ie
lawn fertilizer, dog food, clothing, ect... and this person receives a patronage dividend, then the dividend would be non-taxable
 

#6
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Check the instructions for schedule F
 

#7
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Reviving my own thread. Don't know why I get so many of these.
I have a new client who came in with a 1099-PATR, with box 1 income (patronage dividends) for about 1,400 dollars. He works for a bike cooperative. So, this is certainly not Sch F, like some others I have seen.
If my client is an employee of this cooperative and receives this, does this amount get reported either as Other income on line 21? In Drake, the PATR screen can only be routed to Sch C, Sch F and 4835, so I am somewhat skeptical of my initial thoughts here...
Thanks,
Jake
 

#8
Chay  
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Patronage dividends are essentially recoveries. See https://www.irs.gov/publications/p525#e ... 1000229391

You can think of this type of income as though it were a refund of state taxes paid. It's only taxable to the extent that the taxpayer enjoyed a tax benefit from the item. If it's a refund of amounts paid in the same tax year, it just reduces those amounts, but if the refund arrives after the year of the deduction, then the refund should be reported as income. I'm not clear on what the exact rationale is for this as opposed to reducing some corresponding deduction in the current year, but it's well established that this is the correct treatment (check out the link above).

To the extent that the taxpayer still has some basis in the item in question, the refund will always reduce that basis to nothing before the first dollar of income is recognized. Any income should then be reported either on the schedule where the deduction was originally claimed, if appropriate, or else on line 21.

I would never trust Drake as an authority on the tax treatment of an item. It's not that it does anything incorrectly, it's that there are a whole lot of things that it simply doesn't have an option for that are nevertheless valid. The most frustrating of these for me is getting investment interest from Form 4952 to flow to somewhere besides Schedule A - not only is it not automatic, there's no way to override it either so the client is forced into either claiming this interest below the line or paper filing.
 

#9
HowardS  
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I think this PLR provides a definition of what a "patronage dividend" is:
PLR-132984-17 3
Cooperatives are a unique form of business entity, which are democratically
controlled by their patrons. In cooperatives, each member has one vote regardless of
how much capital the member contributed. Cooperatives are required to allocate their
net margins from business done with or for their patrons back to their patrons in
proportion to their patronage. This return of patronage-sourced income is bound up
with the basic concept of a cooperative. Rather than using their net income to pay
dividends to their shareholders, as a regular business corporation would, cooperatives
pay patronage dividends to their members based on the amount of business that the
member does with the cooperative. Patronage dividends are thus effectively price
rebates for member-patrons
. See CF Industries, Inc. v. Commissioner, 995 F.2d 101,
103 (7th Cir. 1993).

If you are reporting the price paid for materials/supplies as an expense for your farm or other business then reporting this as income effectively reduces that expense deduction (you could arguably record it as a negative expense). Your client sounds like his patronage dividend is personal use and thus not reported as income since there is no expense deduction....it's a rebate.
Retired, no salvage value.
 

#10
mscash  
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Employees are paid salaries. If the client is an employee, fill in the blanks.
 

#11
Chay  
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mscash, not everything an employee receives from a company he/she works for is necessarily salary. If the amounts received do not depend on employee status, then the employer / employee relationship is not controlling. Take for example stock options. To the extent that ordinary members of the public would not be able to benefit from the benefits of such plans, compensation is recognized. Afterwards, dividends and capital gains from the shares are treated identically between the two classes of investor.

The very nature of patronage dividends ("paid back from profit to those who have made purchases") implies that there is no special status afforded to employees and thus they aren't compensation.

Only in the unusual case where employment does grant some special status that allows access to the patronage dividends could there be some compensation involved.
 

#12
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regicide9 wrote:Reviving my own thread. Don't know why I get so many of these.
I have a new client who came in with a 1099-PATR, with box 1 income (patronage dividends) for about 1,400 dollars. He works for a bike cooperative. So, this is certainly not Sch F, like some others I have seen.


Does your client, on top of working for this cooperative, purchase stuff from them? A person working for a bike cooperative might be the type to buy expensive bikes and bike supplies.
 

#13
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Chay and Howard S,
I really appreciate all of this info. Thank you, its never been broken down so clearly for me.
That said, I still have a question.
Again, my client was an employee of a bike cooperative, and he received a1099-PATR from the bike cooperative. He no longer works there. When I asked him what the dividend was tied to, he said it was "for working there". I pressed and asked if it was based perhaps on what he had bought thru the cooperative (like if he bought bikes or bike parts or whatever) and he didn't think that was the case. If it is not a return of his capital for buying personal use stuff thru the coop, then what other reason would an employee receive a PATR dividend? Or, does he just not realize that is what he is getting the dividend for?
Thanks,
Jake
 

#14
HowardS  
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Or, does he just not realize that is what he is getting the dividend for?

Exactly. And he would not be the first.
You'll only know for sure if you contact the coop or the coop's tax preparer.
Given that patronage dividends are not always taxable, I doubt any 1099-PATR matching is done and if you absolutely cannot determine that it is income, I would exclude it from the tax return. The PLR I cited:
Patronage dividends are thus effectively price rebates for member-patrons.
Retired, no salvage value.
 

#15
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Howard,
Thanks for your insight. Makes perfect sense. Funny that I hadn't actually thought to just get in touch with the coop's tax preparer. I'll do that after the holiday:)
Thanks,
Jake
 

#16
Jake  
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The Asian lady at the massage parlor near the airport gave me a patronage dividend - I will treat that as a frequent flyer reward. My back feels a lot better - or is it my front? Not taxable. And to think that NBC hired Comedian Jimmy Fallon to replace Leno instead of me. Jake2. :-)
 

#17
Chay  
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Sounds like services rendered in an arm's length transaction. No realized gain?
 

#18
Jake  
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Chay wrote:Sounds like services rendered in an arm's length transaction. No realized gain?


Maybe you can take Jimmy Fallon's gig. We gotta have a little levity here - right? :-)
 

#19
Chay  
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Maybe you can take Jimmy Fallon's gig. We gotta have a little levity here - right?

I think I'll stay here at the forum. Surely the absurd 4 million word Internal Revenue Code is absolutely brimming with comedic potential despite the serious face the IRS tries to put on the whole thing.
 

#20
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So, I spoke to the tax preparer who prepares the tax return for the cooperative. I asked what the patronage dividend represented, and she was politely adamant that the patronage dividend was in no way tied to discounts on products -- that it was the employee's share of the profit of the cooperative, therefore taxable, on line 21 of 1040.

Other points that may be relevant: The preparer confirmed that each employee of the cooperative must pay 2,000 dollars upon being hired, of which, is fully refundable upon leaving the cooperative.

The instructions for 1099-PATR say the following on the first page:

Report dividends paid on a cooperative's capital
stock on Form 1099-DIV, Dividends and Distributions.


Then, below as a caution point, it says:

CAUTION: Report on Form 1099-PATR only items of income,
expenses, and credits that you properly pass through to
patrons for reporting on the patron's tax return.


If this is passing thru a share of the profits, shouldn't this actually be reported on a 1099 DIV?
 

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