What are the benefits of being a Farm Credit member?
One of the most important benefits of being a Farm Credit member-borrower is that you stand to share in the association's profits.
Most businesses return their profits to their investors, not their customers. However, your Valley Farm Credit association returns its profits to its customers, or member-users. That's the cooperative way of doing business.
At the end of each fiscal year, Valley Farm Credit determines its total income and expenses. Income remaining after all expenses are deducted (net income) can then be distributed in accordance with the bylaws.
Valley Farm Credit's board of directors can elect to
- retain all of the net income to strengthen the association's capital position, or
- distribute some or all of the association's net income to borrowers by declaring a dividend on stock or declaring a patronage refund.
What is a patronage refund?
A patronage refund:
- is a way of distributing the association's net income to member-borrowers. A borrower's refund is based on his business activity with the association.
- may be paid in cash, allocated surplus, stock, or any combination of these items.
How do patronage refunds benefit Farm Credit borrowers?
Patronage refunds benefit borrowers by reducing their cost of borrowing. Valley Farm Credit charges competitive rates on its loans - rates comparable to those charged by other lenders for similar loans.
However, a major difference between Valley Farm Credit and other lenders is that Valley Farm Credit returns its profits to its borrowers. When you receive a patronage refund from Valley Farm Credit, your effective cost of borrowing is reduced.
One of the basic cooperative principles is that members derive benefits based on their use of the cooperative's services. Therefore, the more business you do with Valley Farm Credit, the larger your potential patronage refund.
How do patronage refunds benefit your Farm Credit association?
Patronage refunds can help your association reduce its tax expense and maintain a strong capital position. This helps the entire membership because an association with a strong capital position is better able to offer competitive interest rates, ensure a constant supply of credit and provide for the retirement of member equity held in the form of allocated surplus.
Unlike other corporations, where profits are taxed twice - when earned by the corporation and when distributed to owners as dividends - a cooperative's profits are taxed only once when they're distributed as a patronage refund.
Your cooperative is allowed a tax deduction for the amount of net income that it distributes in the form of a qualified patronage refund. Therefore, to effectively manage the association's tax expense and maintain a strong capital position, your association's board may elect to distribute taxable earnings to members as a qualified patronage refund. A qualified patronage refund is one in which at least 20 percent is paid in cash and the remainder in stock or Qualified Allocated Surplus (QAS).
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We Put Our Profits In Your Pockets!
Valley Farm Credit has returned more than $6,680,000 to our customers!
What is allocated surplus?
Members, through their boards, usually elect to leave a portion of the patronage refund in the cooperative to help keep its operations on a sound financial basis.
The retained portion of each member's patronage refund is recorded on the books of the association, or allocated to each member's equity account. This retained patronage refund is called Allocated Surplus. Allocated Surplus can be either Qualified or Nonqualified.
Qualified Allocated Surplus
- is a portion of the patronage refund your association retains for the purpose of accumulating capital.
- can be retired only when approved by the association's board of directors. The association's goal is to operate efficiently and maintain a strong permanent capital base. It is the board's responsibility to continually monitor the financial position of the association. The board may vote to retire QAS when it determines the association does not need it for capital.
- is issued in annual series, with each series being identified by the year in which it was issued. Similarly, allocated surplus can be retired only by series, or portions thereof. Under the bylaws, the association cannot honor requests from members to retire individual allocated surplus accounts.
The Internal Revenue Code allows your association to claim a tax deduction for a patronage distribution made in the form of QAS in the year it is issued, as long as at least 20 percent of the total patronage refund is paid in cash. The Internal Revenue Code requires that patronage distributions in the form of QAS be treated as taxable income to the member in the same manner as cash distributions. Association members should consult their tax advisors to determine if they must declare such patronage refunds as taxable income in the year they receive them.
Members do not have to pay tax on QAS when it is retired since they paid tax on it when it was issued.
Nonqualified Allocated Surplus
- is another way your association can distribute its net income. Nonqualified Allocated Surplus (NAS) is not deductible by your association or taxable to you in the year it is issued. Rather, members pay tax on NAS only when the board of directors elects to retire it for cash. Such cash retirement would be deductible by your association.
Nonqualified Retained Surplus
- is another way your association can distribute its net income to build capital. Your association's board considers Nonqualified Retained Surplus (NRS) as earnings permanently invested in the association. As such, there is no plan to revolve or redeem NRS. For tax purposes, NRS is treated the same as Nonqualified Allocated Surplus in that the amount retained will become taxable income to association members only when the board elects to retire it. However, due to its nature, it is not probable that NRS will be retired except upon liquidation of the association, in which case, it would be subject to distribution in accordance with the association's bylaws.
How is my patronage refund issued?
The cash portion of your patronage refund may be issued to you by check or recorded on the association's books in a special account.
When any portion of a patronage refund is paid in cash, your board of directors may elect to set a minimum check amount as a means of controlling expenses. Cash distributions below the minimum check amount are recorded in a special account called Patronage Payable.
Members may request a check for monies in their patronage payable accounts, request that these amounts be applied to their loans, or leave these distributions "on account" with the association.
Patronage refunds issued in the form of allocated surplus can only be retired, or paid to members, upon approval of the board. Under the bylaws, the association cannot honor requests from members to retire individual allocated surplus accounts.
Each time a patronage distribution is issued, your Farm Credit association will notify eligible members of their patronage refunds. The notification will include a breakdown of the amount paid in cash (by check or Patronage Payable entry) and the amount paid in allocated surplus or stock.
Will I receive a tax notification regarding my patronage refund?
Yes. Each January, Valley Farm Credit will send you an IRS Form 1099. This form will show the total of all patronage refunds issued to you during the previous year. If a portion of a patronage refund was paid in Qualified Allocated Surplus, the 1099 will include the cash and allocated surplus portions of the patronage refund.
If you have any questions about patronage refunds, your loan, or other business you might do with Farm Credit, please give your loan officer a call. We appreciate your support and look forward to serving you in the future.
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