Co-op patronage and equity

Definition

A dairy co-op is owned by its members and returns its margins to them in proportion to how much milk they marketed through it (patronage). The tax rules for this are in Subchapter T of the Internal Revenue Code (26 U.S.C. §§ 1381–1388).

Key terms:

Patronage dividend (patronage refund): the co-op’s net margin from member business, allocated to members by patronage. The co-op deducts it from its own taxable income, and the member reports it.
Qualified written notice of allocation (26 U.S.C. § 1388(c)): a notice telling the member how much was allocated. To be qualified, at least 20% of the patronage dividend must be paid in cash (money or qualified check), and the member must consent to include the full stated amount in income. Consent is given in writing, by keeping membership after the co-op adopts a consent bylaw and notifies the member, or by cashing the qualified check within 90 days after the payment period. The non-cash part becomes allocated equity in the co-op.
Non-qualified notice (§ 1388(d)): the co-op gets no deduction for it when issued, so it is taxed on it now; it takes the deduction, and the member reports income, only when the notice is redeemed in cash (§§ 1382(b)(2), 1385(c)).
Per-unit retain (PUR): an amount the co-op withholds per unit of product (e.g. per cwt) to build capital, regardless of margins. A qualified per-unit retain certificate (§ 1388(h)) is treated like a qualified notice for tax. It needs the member’s written or bylaw agreement but no 20% cash payment.
Revolving fund / equity redemption: the co-op pays out old equity after a set number of years or at the board’s discretion; some redeem at retirement or estate settlement.
Base capital plan: the co-op sets a target equity per unit of patronage (e.g. per cwt over a base period). Members under target have more retained; members over target get equity returned.
§199A(g) deduction: a farmer co-op may deduct 9% of the lesser of its qualified production activities income or its taxable income, capped at 50% of its W-2 wages. It may pass all or part of that deduction to patrons. To do so it identifies the amount in a written notice mailed during the payment period, and the patron then deducts it.

These are the statutory rules as of November 2026. A member’s own tax result still needs a tax advisor.

How to pull it in DC305

Not applicable. DC305 holds cow records, not co-op equity or patronage data.

Source: the co-op’s annual patronage notice, member equity statement, and the retain lines on the monthly milk check (see milk check); for tax, Form 1099-PATR.

Typical range

Herd context: US dairy marketing co-ops; values vary widely by co-op and year.

Cash share of patronage dividends: at least 20% for qualified notices; many co-ops pay 20–50% in cash.
Per-unit capital retains: from a few cents to around $0.50/cwt.
Revolving period: commonly 5–20 years, or tied to retirement.

Common mistakes

Booking retains as an expense. They are equity in the co-op, an asset, though often illiquid and valued at a discount.
Valuing allocated equity at face value. Equity that won’t be redeemed for many years is worth less than face; lenders often discount or exclude it.
Confusing patronage dividends with milk price. Patronage depends on the co-op’s annual margins and comes after year-end.
Assuming all notices are taxed the same. Qualified and non-qualified notices are taxed at different times.
Forgetting the cash needed for tax. A member may owe tax on the full qualified allocation while receiving only part in cash.