The New Role of Agricultural Cooperatives in Pooling and Distributing Tax Deductions

Phil Kenkel, Greg McKee, Mike Boland and Keri Jacobs

U.S. Agricultural cooperatives create unique benefits for their producer members (USDA- RBCS, 1990).  Cooperatives create economies of scale and scope in procuring inputs and marketing and processing commodities (Sexton 1990). Those scale economies also help to provide access to markets.  Cooperatives provide an unseen and often unappreciated benefit in offsetting market power and maintaining the competitive environment. Agricultural cooperatives are unique in that they are an extension of the farm or …

Cooperative Taxation

Phil Kenkel

Bill Fitzwater Cooperative Chair, Oklahoma State University

Sub-Chapter T

Any corporation or LLC “operating on a cooperative basis” can be taxed under Sub Chapter T of the Internal Revenue Code.  Sub Chapter T does not apply to mutual savings banks, mutual insurance companies, or rural electric or telephone cooperatives.  All of those organizations are taxed under separate special sections of the IRS code.  Consumer and retail cooperatives are taxed under Sub Chapter T.  The taxation classification of a …

The Section 199 Deduction and Patronage Calculations

By Phil Kenkel, Bill Fitzwater Cooperative Chair, Oklahoma State University.

There is generally a gap between tax-based net income and book-based net income. While the IRS prefers to use taxable income as the patronage base, cooperatives can calculate patronage on either a tax or a book basis. Patronage refunds originated with the Rochdale principles, which stated “net margins distributed according to patronage.” This concept is reflected in Subchapter T of the IRS tax code, which lays out three basic criteria …

The Tax versus Book Accounting Gap

By Phil Kenkel

Bill Fitzwater Cooperative Chair, Oklahoma State University

Financial accounting and tax accounting have different goals. Financial accounting strives to provide owners and managers with an accurate picture of the firm’s economic position. The tax code is created to raise money for the government. Legislators use the tax code to provide economic incentives for targeted activities. These differences create a gap between book and tax measures of earnings. One difference is depreciation. This is an example of a …

Do cooperatives pay taxes?

With regard to income, cooperatives may qualify as a “single taxed” or pass-through entity in the eyes of federal or state taxing authorities. This means that the tax liability for income to the cooperative is passed through to the members rather than “double” taxed at both the cooperative and member level. Like any other business, cooperatives pay other types of taxes such as employment or property taxes.

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