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Patronage Dividends

Patronage Dividends
February 23, 2021 Lena Tito

Patronage dividends, or refunds, are the cooperative method of sharing a co-op’s earnings with its members in profitable years. As members of the co-op, you also own the profits, and a patronage dividend system allows us to share and reinvest those profits in a transparent, mutually beneficial way.

Members receive a share of the profits in proportion to how much they purchased during the fiscal year (August 1 – July 31), rather than how many shares each member owns. The more you shop, the more you are eligible to receive. At the end of the fiscal year, if the co-op is profitable, Co-opportunity’s Board of Directors reviews anticipated projects and financial needs of the co-op and uses that information to determine how much of the profits to retain and how much to give back to members. The amount retained stays in the co-op and becomes part of what we own together as an investment in community ownership. The remaining profits are then returned to the members.

The decision to offer a patronage dividend is made following the end of our yearly financial audit usually in December or January after the close of the prior fiscal year.

How do Patronage Dividends Work?

The amount of the dividend varies from year to year based on how much profit the co-op made from member purchases and the need to fund any upcoming projects. In years that the co-op does well, the members share in that success by getting a larger dividend. If the co-op has a leaner year due to increased competition or has a need for reinvestment, it can choose to save more internally and distribute less. If the co-op has no profit, no patronage dividend will be distributed.

Whether distributed or retained, patronage dividends reduce the co-op’s tax obligations and keep more money circulating in the local economy. According to the IRS, the Board can choose to distribute anywhere from 20%-100% of the refund amount as cash to members. Since the IRS allows the co-op to retain up to 80 percent of the allocation, the retained portion provides a tax-free and interest-free way to cover capital expenses for the business (new equipment, store improvements, capital accumulation for growth opportunities, etc.).

Retained equity is redeemed when the Board determines that it is no longer needed for capital purposes. Retained patronage is an important factor in our co-op’s financial health. Member equity helps us to obtain financing, increases operational flexibility, and ensures adequate cash flow for the business.

FAQ:

I did not receive my 2020 patronage dividend. Where is it?

At last year’s virtual Member Annual Meeting, management shared the news that the co-op suffered operating losses primarily related to COVID-19 and our Culver City expansion. As a result, there was no profit and no patronage dividend allocation for the 2020 (August 1, 2019 – July 31, 2020) fiscal year.

During years when the co-op is profitable, can you further explain the retained amount?

The retained amount is set by the Board after reviewing the previous year’s financial returns. As with any business that you own, it is necessary to reinvest profit to keep the business functioning properly and to help it thrive and compete. Most co-ops, including Co-opportunity, use a 20/80 split in order to build capital. The retained portion gives the co-op resources to use for various opportunities. Patronage refunds are not large sums of money, but when aggregated, they benefit the cooperative’s growth opportunities in a significant way.

Is retained patronage refunded when a member withdraws?

Retained patronage is not returned after termination of membership. It may only be redeemed when the Board determines it is no longer needed for capital purposes. Retained patronage would be distributed in the same way that fiscal year-end patronage is currently being distributed when it is available to be redeemed.

What is the “capital account”?

This is the name of the record kept of all retained patronage. This is not an accessible account. When there is retained patronage, the amount being retained is always provided on the check stub that accompanies the annual refund.

How do I know my purchases are being recorded?

Your purchases are recorded each time you provide your membership information at the register or online at Co-op Curbside and Delivery. If your membership is not in good standing, purchases are not recorded. Recording of purchases will resume when payment is made and the account is once again in active.

What if I do not spend or cash my patronage dividend?

During years when the co-op distributes patronage dividends, the co-op encourages you to redeem your refund! Members must cash dividend checks, use store credits, or donate the dividend before the deadline indicated on the notification letter. The dividend is no longer available to you after that date. Unredeemed patronage dividends may escheat to the co-op’s general operating fund under California Cooperative Law.

Can I donate my patronage dividend?

Absolutely. You can donate your refund to our Cooperative Community Fund (CCF). The CCF is an endowment fund established by Twin Pines Cooperative Foundation and a group of cooperatives, to enable community giving. The fund interest earned each year on the principal is donated to non-profits and cooperatives in our community

Are patronage refunds considered taxable income?

Your patronage refund is not considered taxable income if your purchases were for personal/household consumption.