For many individuals who belong to a co-op, you are probably used to receiving a 1099-PATR, and you probably give it to your accountant thinking they know what to do with it. Never asking the question "are all patronage dividends the same?"
Most tax professionals will list it as miscellaneous income on a schedule F or other income on form 1040, but that is not always where it should go. There are two different ways patronage dividends are taxed and one where they are not taxed at all. The most common is to assume that the dividends were earned purchasing everyday materials or supplies used in a business operation. In this case, it is taxed as ordinary income on a business return most commonly schedule F. If the dividends were earned purchasing a capital asset (tractor, combine), it should not be reported as income but used to reduce the cost of the asset and reducing the depreciation taken every year the asset is in use.
The one case where the dividends are exempt from tax is when they are earned from purchases for personal or family use (you know that four-wheeler you bought for the kids but never use yourself). The dividends are not taxed because the purchase was never deducted from your income making the money spent already taxed.
So, this year remember to let your accountant know if any of your patronage dividends were earned for personal and family purchases, so we can save you a little green.
Posted by Nathan Thieneman, CPA, CFE