What is a Patronage Refund?

What is a patronage refund?
When co-ops have a profit left over at the end of the fiscal year they may distribute the owners' share of the profit back to the owners in the form of a patronage refund. These profits are distributed in direct proportion to a co-op owner’s patronage (purchases).

How is the patronage refund calculated?
At the end of our fiscal year (July–June), after determining the amount of Owner-generated profit (based on Owners percentage of total sales), the Board of Directors decides on a refund percentage to distribute. According to the IRS, at least 20% of the Owners’ patronage refund must be distributed as cash or equivalent. The Board may choose to retain up to 80% of each Owner’s patronage refund (as equity in Owners’ names) for projected capital and other business needs.

This year, the Board of Directors elected to distribute 20% of Owner-generated profits as store credit (cash equivalent). Each Owner’s individual refund will be based on how much they purchased as an active Owner from 6/29/09 - 6/27/10.

What is IRS code section 1385?
This code section explains how patrons are taxed on the refund. Unless your purchases were for a business, your refund is not taxable as it is considered to be a refund on purchases of personal items.

How will I know that my purchases are being recorded?
In order to record your purchase you are asked your Owner number by the cashier before each transaction. The cashier will confirm your name on the account before ringing up your items. All merchandise rung through after that point is recorded by our register system.

What can I do to make sure I receive my refund?
To be informed of your refund and all cooperative news, it is important to keep your current mailing information up-to-date with us. If you have a refund due, the register system will alert the cashier once they enter your Owner number at the beginning of the sale. They will ask if you’d like to use the credit with that transaction, or save it to be used a later date.

What were my purchases for the period 6/29/09 to 6/27/10?
This information is listed on your patronage refund statement which is on the back side of the letter that was mailed to the address we have on file.

l didn’t receive my patronage refund or statement. How do l request a copy?
Please contact Co-op Services:

• Phone: (608) 237-1217
• Mail: Willy Street Co-op, Attn: Co-op Services, 1882 E. Main Street, Madison, WI  53704

Do sale items count toward my patronage refund?
Yes, all Willy Street Co-op products that you purchase is credited to your patronage refund. Sale items are credited only at the sale price.

What purchases don’t count toward my patronage refund?
Seafood Center and Okinawa Sushi items purchased are not calculated into the patronage, nor are CHIP contributions, Co-op-branded merchandise, or any of the ticket sales for area fundraisers, shows or bus passes. Equity payments are not merchandise sales and are not counted toward a refund. Access users are credited with the total after their 10% discount has been deducted.

What happens if I don’t use my credit?
By law, if your refund isn’t used before July 4, 2011, the Co-op must record that amount as income and pay the necessary taxes on that amount and your refund is officially forfeited.

Do l have to pay income taxes on the patronage refund?
No, patronage refunds are not taxable income unless your purchases were for business purposes rather than personal use; if this is the case for you, please consult your tax adviser.

When did the Co-op decide to issue patronage refunds?
At the recommendation of the Patronage committee, the Board approved issuance of Patronage Refunds in future years in 2009. The Board approved distributing profit from FY2010 in 2010.

Is the patronage refund money something I can take out at some point in the future? What does it mean that it's retained in my "name"?

The surplus (a.k.a. profit) we earn has always belonged to Owners. However, previously the surplus was designated as Unallocated and we paid federal income tax on the full amount. The only difference now is that we are allocating the surplus to Owners proportionate to their patronage.

From the Co-op’s perspective, we’re essentially not doing anything differently with the surplus than we’ve done in the past. In the past, when we’ve earned a surplus we’ve put it back into the Co-op to expand operations, purchase new equipment, upgrade facilities or meet current operating needs. The two main differences now are

1. Owners have the surplus that we put back into the business directly in their name as equity (just like owners of most business); and
2. We do not pay federal income tax on the full refund that is allocated to Owners. This keeps more money at work in our community that the Co-op would have paid in taxes.

The only time that the retained patronage equity is returned to Owners is if at some date in the future the Co-op Board is in a position to do so and returns all the equity from a given year. It is unlikely that retained equity will be returned to Owners in this way. More likely is that there will be future years where we decide to retain a smaller percentage of the refund as equity and offer a larger percentage as store credit.

Owners’ Fair Share amounts ($56/$91) are a different class of equity and are available for refund upon request.
Most importantly, all businesses incorporated as cooperatives in Wisconsin are able to take advantage of significant tax savings by distributing profit back to their owners.

How your refund is calculated in three easy steps!
Step 1: The Co-op earns a profit.

• In fiscal year 2010, the Co-op earned a taxable income before patronage refunds of $618,550, which is 3.1% of sales.

Step 2: We make a few decisions.

Decision 1: The Board decides whether or not to declare a refund.

• Cooperatives can declare up to 100% of profits from owners as refunds.
• In FY2010, 94.5% of profits came from sales to Owners! After taxes and related adjustments, this made $520,598 in profit available for refunds. The Co-op Board elected to return 100% of these profits back to Owners as refunds.

Decision 2: The Board decides what percentage of the declared refunds to return to the Owners as store credit versus equity retained in each Owner’s name.

• Cooperatives have to distribute at least 20% of declared refunds as cash (or equivalent).
• In FY2010, the Co-op Board decided to distribute 20% ($104,120) of declared refund as a store credit. The 80% ($416,478) of the refunds that is not distributed to Owners is retained in the Co-op as equity in each Owner’s name.

Decision 3: The Board decides on a minimum store credit.

• In FY2010, the Co-op Board decided not to enforce a minimum store credit. Due to administrative costs of the store credit distribution, the Co-op may elect to enforce a minimum. Many other co-ops elect not to distribute cash refunds less than $2.00.

Step 3: We do some math:

Thank you for being a Willy Street Co-op Owner!