Cooperatives issue Form 1099 PATR to those taxpayers that received money from the cooperative. Taxpayers will receive these forms in January 2013 to report calendar year 2012 information to its patrons. This form has a lot of information on it that affects an individual’s farm tax schedule, so it’s important that those receiving these forms from the cooperative understand these various elements. You can find the updated form here: http://www.irs.gov/pub/irs-pdf/f1099ptr.pdf.
Boxes for taxpayer name and identification numbers: It is important that the cooperative and patron recipient have identification numbers aligned with the entity who actually received the distribution.
Original, void or corrected Form 1099-PATRs: The IRS will match all cooperative distributions reported on box 1 and 3 to the recipient’s tax returns. If members are not flagged appropriately by the cooperative, and the form was issued to the party who did not receive the distribution, then voided and corrected forms should be issued. The issuer will check the “void” or “corrected” box at the top of the 1099 form if applicable.
Box 1 – Patronage Dividends: Lists the patronage dividends paid to the recipient in cash, qualified written notices of allocation (at stated dollar value) or other property.
Cooperatives generally issue “qualified written notices of allocation” to their members in the form of equity in the cooperative. At least 20% of the patronage dividend or payment must be in cash to be a “qualified written notice of allocation.” In this case, if the source of the patronage dividend was derived from an expenditure deducted on your tax return, then the entire amount both cash and noncash portions of the patronage dividend must be reported as income on your tax return. If related to farming expenditures, then report the patronage dividend on Schedule F as cooperative distributions. The noncash portion represents the amount of qualified patronage dividends which have been reported as income for tax purposes, but which have been retained by the cooperative for its use. At some future time, you may be able to receive additional cash redemptions. The cash received at the later date will not be taxable, because you have already reported the amounts on previous tax returns.
Box 2 – Non-patronage Distributions: Shows the non-patronage distributions paid to the recipient in cash, qualified written notices of allocation or other property.
Box 3 – Per-Unit Retain Allocations: A per-unit retain allocation is an amount paid to patrons for products sold for them that is fixed without regard to the net earnings of the cooperative. These allocations can be paid in money, other property, or qualified certificates. Per-unit retain allocations issued by a cooperative generally receive the same tax treatment as patronage dividends and are reported on Schedule F as cooperative distributions.
Per-unit retain allocations paid in money (PURPIMs) include amounts paid to patrons for grain. The amount reported on Form 1099-PATR box 3 is the recipient’s calendar year 2012 gross grain sales (rather than net grain sales) to the cooperative. Members should reclassify grain sales as PURPIMs on the farm income tax schedule. Generally, the items that differ from net grain sales to gross grain sales include deductions from grain checks for storage, drying, trucking and check-off expenses. Remember that even if the cooperative has a fiscal year, the cooperative will report these payments to members for their grain purchases paid during calendar year 2012 on Form 1099-PATR box 3.
Box 4 – Federal Income Tax Withheld:Lists the backup withholdings for the recipient. If the recipient did not provide the cooperative with a tax ID number, the cooperative must withhold 28% of any distributions.
Box 5 – Redemption of Nonqualified Notices and Per Unit Retain Allocations: Shows the amount the recipient got when he or she redeemed nonqualified written notices of allocation and nonqualified per-unit retain allocations. If you receive a non-qualified patronage dividend, the cash received is taxable income. If you receive a nonqualified notice of allocation, retain the notice in your permanent records, but no tax impact occurs at this time, only when cash is received upon later redemption.
Box 6 – Domestic Production Activities Deduction: Reports the amount of Section 199 Domestic Production Activities Deduction (DPAD) that the cooperative allocated to the recipient during calendar 2012. The deduction represents the amount the recipient may take based on his or her portion of patronage dividends or per-unit retain allocations attributable to Qualified Production Activities Income (QPAI).
Your local cooperative computes DPAD for its fiscal year-end based on 9% of QPAI. Recent IRS rulings allow cooperatives to treat grain purchases from its members as per unit retain allocations paid in money (PURPIMs) for purposes of calculating the DPAD. This classification means that the cooperative is not required to deduct the PURPIMs when calculating QPAI and therefore DPAD. The cooperative, for its fiscal year, computes the DPAD in accordance with these rules and then elects to pass through the deduction to its members during 2012. The deduction is based on grain payments made to its members during the applicable payment period (from the beginning to the end of the cooperative’s fiscal year). The deduction is also limited to 50% of qualified wages paid by cooperative. The wage limitation does not apply a second time to the amount passed through to the member on its tax return.
In order for the patron to qualify for the deduction, the cooperative must designate the patron’s portion of the Section 199 deduction in a written notice of allocation of DPAD (required to be mailed to the patron no later than the 15th day of the ninth month following the close of the cooperative’s fiscal year) indicating that the cooperative made an election to pass the DPAD on to its members. The recipient’s allocated DPAD is deductible on Form 8903 line 23 for members with a calendar or fiscal year ending within the date of the written notice.
Boxes 7, 8, 9 and 10 – Various Tax Credits: These boxes list various tax credits, such as the investment tax credit or work opportunity credit, passed through from the cooperative to the recipient.
Should you have any questions regarding the information on any tax form and what it means for you and your agribusiness, please contact one of the Bergan Paulsen ag team members for more information.