Owner purchases at Friendly City Food Co-op can add up to patronage dividend rewards each year.
Patronage dividends are directly tied to the health and profitability of the business and to your essential dual role of the consumer-owner. The co-op’s board of directors decides to allocate earnings to owners only after ensuring that the business has actually made money. And since the business is more likely to show a profit if the owners use the co-op, patronage refunds support a mutually beneficial relationship.
The tax laws allow patronage dividends paid to a co-op’s individual owners to be a tax deduction for the co-op. Since these are deductible to the cooperative and not taxable to most owners, the patronage dividend is typically not taxed at any level. Reduced taxation is a significant advantage to patronage refunds for retail food co-ops.
After the fiscal year is finished, when a profit is achieved, the board decides whether or not to declare a patronage dividend. If they decide to do so, the board then decides to pay out as much as 100% of the dividend, or as little as (but no less than) 20% of the amount.
A Qualified Notice of Allocation is provided to each owner, which outlines:
- What the funds are
- Amount of non-cash portion retained by the Co-op
- Any deadlines or consequences of the owners using or not using the funds.
How it is Calculated:
- Co-op’s net income X Total % of sales to owners = Eligible patron net income (EPNI)
- Individual owner’s patronage / Total Owner Patronage = Individual owner’s % of all owners patronage
- EPNI x Individual owner’s % of all owners patronage = Owner’s dividend
Example Calculation:
For example, in year 2020, the Co-op made $100,000 in profit, from which 30% came from sales to owners. Owner Chris Smith spent $5,000.00 at the co-op that year. Total owner spending that year was $1,000,000.
Using the exact same calculations above:
- $100,000 x 30% = $30,000 (Eligible Patron Net Income)
- $5,000/$1,000,000 = 0.5% (Chris Smith’s % of all owner patronage)
- $30,000 x 0.5% = $150.00 (Chris Smith’s patronage dividend)
