Income From Cooperatives — 2025 Publ 225 (PDF)

If you buy farm supplies through a cooperative, you may receive income from the cooperative in the form of patronage dividends (refunds). If you sell your farm products through a cooperative, you may receive either patronage dividends or a per-unit retain certificate, explained later, from the cooperative.

Form 1099-PATR. The cooperative will report the income to you on Form 1099-PATR or a similar form and send a copy to the IRS. Form 1099-PATR may also show an alternative minimum tax adjustment that you must include on Form 6251 if you’re required to file the form. For information on the alternative minimum tax, see the Instructions for Form 6251.

Patronage Dividends

You generally report patronage dividends as income on Schedule F for the tax year you receive them. They include the following items.

Money paid as a patronage dividend, including cash advances received (for example, from a marketing cooperative).
The stated dollar value of qualified written notices of allocation.
The fair market value of other property.

Don’t report as income any patronage dividends you receive from expenditures that weren’t deductible, such as buying personal or family items, capital assets, or depreciable property. You must reduce the cost or other basis of these items by the amount of such patronage dividends received. Personal items include fuel purchased for personal use and basic local telephone service.

If you can’t determine what the dividend is for, report it as income on Schedule F, lines 3a and 3b.

Qualified written notice of allocation. If you receive a qualified written notice of allocation as part of a patronage dividend, you must generally include its stated dollar value in your income on Schedule F in the year you receive it. A written notice of allocation is qualified if at least 20% of the patronage dividend is paid in money or by qualified check and either of the following conditions is met.

The notice must be redeemable in cash for at least 90 days after it’s issued, and you must have received a written notice of your right of redemption at the same time as the written notice of allocation.
You must have agreed to include the stated dollar value in income in the year you receive the notice by doing one of the following.

a. Signing and giving a written agree ment to the cooperative.

b. Getting or keeping membership in the

cooperative after it adopted a bylaw providing that membership constitutes agreement. The cooperative must no

tify you in writing of this bylaw and give you a copy.

c. Endorsing and cashing a qualified

check paid as part of the same patronage dividend. You must cash the check by the 90th day after the close of the payment period for the cooperative’s tax year for which the patronage dividend was paid.

Qualified check. A qualified check is any instrument that’s redeemable in money and meets both of the following requirements.

It’s part of a patronage dividend that also includes a qualified written notice of allocation for which you met condition 2c above.
It’s imprinted with a statement that endorsing and cashing it constitutes the payee’s consent to include in income the stated dollar value of any written notices of allocation paid as part of the same patronage dividend.

Loss on redemption. You can deduct on Schedule F, Part II, any loss incurred on the redemption of a qualified written notice of allocation you received in the ordinary course of your farming business. The loss is the difference between the stated dollar amount of the qualified written notice you included in income and the amount you received when you redeemed it. Report the loss on redemption as an expense on Schedule F, Part II, line 32 (Other expenses). Label the expense as “Loss of Qualified Co-op Allocation.”

Nonqualified notice of allocation. Don’t include the stated dollar value of any nonqualified notice of allocation in income when you receive it. Your basis in the notice is zero. You must include in income for the tax year of disposition any amount you receive from its sale, redemption, or other disposition. Report that amount, up to the stated dollar value of the notice, on Schedule F. However, don’t include that amount in your income if the notice resulted from buying or selling capital assets or depreciable property or from buying personal items, as explained in the following discussions.

If the amount you receive is more than the stated dollar value of the notice, report the excess as the type of income it represents. For example, if it represents interest income, report it on your return as interest.

Buying or selling capital assets or depreci- able property. Patronage dividends from buying capital assets or depreciable property used in your business are not included in income. You must, however, reduce the basis of these assets by the dividends. This reduction is taken into account as of the first day of the tax year in which the dividends are received. If the dividends are more than your unrecovered basis, reduce the unrecovered basis to zero and include the difference on Schedule F for the tax year you receive them.

This rule and the exceptions explained below also apply to amounts you receive from the sale, redemption, or other disposition of a nonqualified notice of allocation that resulted from buying or selling capital assets or depreciable property.

Publication 225 (2025) Chapter 3 Farm Income 15

Example. On July 1, 2024, Mr. Brown, a patron of a cooperative association, bought a used machine for his dairy farm business from the association for $12,900. The machine has a life of 7 years under MACRS. Mr. Brown files his return on a calendar-year basis. For 2024, he claimed a depreciation deduction of $1,382, using the 10.71% depreciation rate from the 150% declining balance, half-year convention table (shown in Table A-14 in Appendix A of Pub. 946). On July 2, 2025, the cooperative association paid Mr. Brown a $300 cash patronage dividend for buying the machine. Mr. Brown adjusts the basis of the machine and figures his depreciation deduction for 2024 (and later years) as follows.

Cost of machine on July 1, 2024 . . . . . . . . . . $12,900 Minus: 2024 depreciation . . . . . . . . $1,382 2025 cash dividend . . . . . . . $300 $1,682

Adjusted basis for depreciation for 2025: . . . . . . . . . . . $11,218

Depreciation rate: 1.0 ÷ 6 ¹ /2 (remaining recovery period as of 1/1/2025) = (0.1538) × 1.5 = 23.07%

Depreciation deduction for 2025 ($11,218 × 0.2307) . . . . . . . . . . . . . $2,588

Exceptions. If the dividends are for buying or selling capital assets or depreciable property you didn’t own at any time during the year you received the dividends, you must include them on Schedule F, unless one of the following rules applies.

If the dividends relate to a capital asset you held for more than 1 year for which a loss was or would have been deductible, treat them as gain from the sale or exchange of a capital asset held for more than 1 year.
If the dividends relate to a capital asset for which a loss wasn’t or wouldn’t have been deductible, don’t report them as income (ordinary or capital gain).

If the dividends are for selling capital assets or depreciable property during the year you received the dividends, treat them as an additional amount received on the sale.

Personal purchases. Because you can’t deduct the cost of personal, living, or family items, such as supplies, equipment, or services not related to the production of farm income, you can omit from the taxable amount of patronage dividends on Schedule F any dividends from buying those items (and you must reduce the cost or other basis of those items by the amount of the dividends). This rule also applies to amounts you receive from the sale, redemption, or other disposition of a nonqualified written notice of allocation resulting from these purchases.

Per-Unit Retain Certificates

A per-unit retain certificate is any written notice that shows the stated dollar amount of a per-unit retain allocation made to you by the cooperative. A per-unit retain allocation is an amount paid to patrons for products sold for them that’s fixed without regard to the net earnings of the cooperative. These allocations can

be paid in money, other property, or qualified certificates.

Per-unit retain certificates issued by a cooperative generally receive the same tax treatment as patronage dividends, discussed earlier.

Qualified certificates. Qualified per-unit retain certificates are those issued to patrons who have agreed to include the stated dollar amount of these certificates in income in the year of receipt. The agreement may be made in writing or by getting or keeping membership in a cooperative whose bylaws or charter states that membership constitutes agreement. If you receive qualified per-unit retain certificates, include the stated dollar amount of the certificates in income on Schedule F, for the tax year you receive them.

Nonqualified certificates. Don’t include the stated dollar value of a nonqualified per-unit retain certificate in income when you receive it. Your basis in the certificate is zero. You must include in income any amount you receive from its sale, redemption, or other disposition. Report the amount you receive from the disposition as ordinary income on Schedule F, lines 3a and 3b, for the tax year of disposition.