What is a patronage refund?
When co-ops have a surplus (a.k.a. profit) left over at the end of the fiscal year they may distribute the Owners’ share of the surplus 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) and is made up of patronage equity and store credit.
How will I know that my purchases are being recorded?
In order to record your purchase the cashier asks, before each transaction, for your Owner number. They will then 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 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 (shirts, mugs, etc.), Community Room Classes, 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.
Do sale items count toward my patronage refund?
Yes, except for the few items listed above. Sale items are credited only at the sale price.
What happens if I don’t use my credit?
By law, if your credit isn’t used by June 15, 2014, the Co-op must record the amount of your store credit and retained patronage equity as income and pay the necessary taxes on that amount and your refund is officially forfeited.
Do I have to pay income taxes on the patronage refund?
No, patronage refunds are not taxable income unless your purchases were for purposes other than personal use; if this is the case for you, please consult your tax adviser.
Why did the Co-op decide on a $2 minimum for store credit distribution?
The Board and management agreed to apply a minimum $2 store credit as a cut-off point to this and future patronage refunds for two primary reasons:
- The costs associated with distributing a store credit as small as this would outweigh the benefits.
- The Co-op has developed a tax management strategy with input from our auditors that enables us to avoid taxation on these earnings due to a large tax loss carry-forward from Fiscal Year 2011.
What can I do to make sure I receive my refund in years when it’s distributed?
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. They will ask if you’d like to use the credit with that transaction, or save it to be used a later date.
Is the patronage equity 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 every Owner of the Co-op. However, previously 100% of that surplus was designated as ‘Unallocated’ and we were required to pay federal income tax on the full amount.
In the past, when the Co-op earned a surplus we’ve put all of 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:
- Owners have the surplus that we put back into the business directly recorded in their name as equity (just like owners of most businesses).
- We will not pay income tax on any of the patronage refunds allocated to Owners (retained as patronage equity or returned as a store credit). 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 of the patronage equity from a given year. It is unlikely that retained patronage 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 to Owners.
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 surplus back to their owners.
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.
Calculating your refund in three steps
Step 1: The Co-op earns a profit.
- Patronage refunds are based on the income declared on our IRS tax return.
- The Co-op must be profitable in order for patronage refunds to be available.
Step 2: We make a few decisions.
Decision 1: The Board decides whether or not to declare a refund.
- Cooperatives can declare 100% of surplus (aka profits) from Owners as refunds.
Decision 2: The Board decides whether to enforce a minimum refund for Owner credits.
Decision 3: 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).
Step 3: We do some math:
|Example Refund Distribution using 20% distribution||Example Owner #99999|
|x||What you spent at the Co-op during the Fiscal Year||$1000|
|Percentage of total eligble purchases available for patronage|
refund (2.69% for FY13)
|Total Refund for Owner #99999||$26.90|
|=||Equity (80%) + Owner #9999's Store Credit (20%)||$21.52|
Thank you for being a Willy Street Co-op Owner!