What are the benefits to a patronage dividend system?
The Co-op is allowed to exclude from its taxable income amounts paid to its members as patronage dividends. Then, since the Co-op does not always have to pay the full amount of the dividends in cash, the Co-op potentially has additional operating capital available to it for capital needs. It also gives the Co-op a tangible way to share the overall success of the Co-op with members. Although members will be required to take patronage dividends into account for federal income tax purposes, the amount of any patronage dividend is not included in a members’ gross income when used to purchase personal, living, or family items; most member-owner purchases from the Co-op would be included in these categories. The patronage dividend would thus be taxable to a member-owner only if his or her purchases related to the operation of a trade or business or other income-producing activities.
