SMALL BUSINESS COOPERATIVE FORUM
By Steve Schroeder, CPA, MBA, Senior Tax Manager, Eide Bailly, LLP, Fargo, North Dakota The 2017 Tax Cuts and Jobs Act mandates a 21% tax rate for the taxable income of all corporations, including cooperatives. As provided in Internal Revenue Code Section 15, fiscal year entities will calculate their income tax for the fiscal year ending in 2018 using a blended tax rate combining the new and old tax rates. For cooperatives that have paid income tax on patronage income and have made nonqualified allocations of patronage income or unit retains, the reduction in corporate tax rates provides an opportunity to reclaim some taxes that were paid in prior years. The Revenue Act of 1962 (P.L. 87-834) substantially revised the income tax treatment of cooperatives and their patrons. The purpose of the cooperative provisions in the Revenue Act of 1962 was to ensure amounts earned by a cooperative in the course of its cooperative business activity were included in the taxable income of either the cooperative or the patron, subjecting cooperative earnings to a single level of tax. Section 1383 was included in the Revenue Act of 1962 and amended in 1966 to provide that if a cooperative paid tax on nonqualified allocations of patronage income or unit retains, the cooperative would receive a tax deduction worth as much as the tax originally paid when it redeemed those nonqualified items. For example, if a cooperative paid tax in 2000 on nonqualified patronage items at a 34% rate and those items are redeemed in 2018, it will receive a credit for that redemption based upon Winter 2018 | The Cooperative Accountant
the 34% tax rate originally paid and not the lower 2018 corporate tax rate. Many cooperatives use nonqualified patronage dividends and nonqualified unit retains as a way to replenish revolving capital. If those nonqualified items have been timely allocated to patrons, tax practitioners who serve cooperatives will have to understand and apply Section 1383 when those items are redeemed. This can be a complex calculation, even in a relatively simple case, and it can provide surprising benefits. The tax treatment of nonqualified notices of allocation and nonqualified unit retains is straightforward. Nonqualified written notices of allocation and nonqualified unit-retains produce no current tax benefit for the issuing cooperative in the year issued. When a cooperative redeems them, it is entitled to deduct the lesser of the cash paid or the stated dollar amount of the item. If a notice is redeemed in property, the amount of the deduction is limited to the fair market value of the property. When a nonqualified notice is redeemed in the payment period for two or more taxable years, the cooperative must take the deduction in the earlier taxable year. For example, if a calendar year cooperative redeems a nonqualified unit retain on March 1, 2018, the redemption occurs during the payment period for calendar years ending December 31, 2017, and December 31, 2018. The cooperative must take the deduction on the tax return for the year ending December 31, 2017. Section 1383 is an income tax computation that 31
