Allocate patronage and make distributions

Who this is for#

Boards and bookkeepers who need to turn a year's results into allocations and payments, and members who want to understand what they receive.

The short answer#

Net income allocated to patron members, beyond dividends on equity and additions to reserves, shall be distributed to patron members on the basis of patronage ^{P1, § 308B.725, subd. 3}. Distributions must be made at least annually, and the board reports on the prior year's operations at the annual members' meeting ^{P1, § 308B.725, subd. 4}. The bylaws must be adopted before any distribution to members ^{P1, § 308B.241, subd. 3}.

What the statute says#

• Patronage. Business, transactions or services done for or with the cooperative "as defined by the cooperative" ^{P1, § 308B.005, subd. 21}. Define it in the bylaws.
• Reserves. The board may set aside part of net income allocated to patron interests for a capital reserve ^{P1, § 308B.725, subd. 1}. It may also, for patron interests, set aside up to five percent of annual net income for promoting cooperative organization, and establish reserves for buildings, equipment, depreciation, losses and other proper purposes ^{P1, § 308B.725, subd. 2}.
• Allocation units and pooling. A cooperative may establish allocation units (functional, divisional, departmental, geographic or otherwise) and pooling arrangements, may account and distribute on that basis, and may offset the net loss of one unit or pool against the net income of others ^{P1, § 308B.725, subd. 3}.
• Forms. Cash, capital credits, allocated patronage equities, revolving fund certificates, or the cooperative's own or other securities ^{P1, § 308B.725, subd. 5}.
• Nonmember patrons. The bylaws may let nonmember patrons share on equal terms with patron members ^{P1, § 308B.725, subd. 6}. A nonmember patron not eligible for membership may have a refund credited to an individual account, and the board may issue a certificate of interest ^{P1, § 308B.725, subd. 7}.
• Allocation and distribution floors are distinct. Profit allocations to patron interests default to at least 50 percent; original articles or an article/bylaw provision adopted or amended by patron-member vote can reduce this to no less than 15 percent. Cash or asset distributions also default to at least 50 percent for patrons, but reducing that floor to 15 percent requires the specified patron-member vote: subdivision 2 does not repeat subdivision 1's original-articles alternative. Neither is the separate 60-percent financial-rights default in § 308B.601, subd. 3 ^{P1, §§ 308B.601, 308B.721}.
• Unclaimed property. Section 308B.735 permits the alternative distribution of unclaimed property specified in the report to a tax-exempt business entity or organization instead of the commissioner. It still requires the statutory notice to the last known address, or publication if the address is unknown; it is not permission to disregard unclaimed-property reporting ^{P1, § 308B.735}.

Steps#

1. Close the books for the fiscal year (the fiscal year is set in the organizational action; see Hold the organizational meeting).
2. Compute net income by patron-member and other interests as the bylaws prescribe under § 308B.721.
3. Take reserves the board decides on under § 308B.725, subds. 1-2.
4. Allocate the remainder to patrons by patronage under § 308B.725, subd. 3.
5. Choose the form (cash, credits, certificates, securities) under subd. 5.
6. Report to members at the annual meeting ^{P1, § 308B.725, subd. 4; § 308B.511}.
7. Handle tax reporting (below).

What the IRS sources say (patron side and cooperative side)#

The patron-side discussion was partially rechecked against IRS Publication 225 (2025) on 2026-10-16. That publication is written for farmers; this does not verify every cooperative's tax classification or every tax claim on this page.

• Members. IRS Publication 225 (2025), written for farmers, says members who buy supplies or sell products through a cooperative may receive patronage dividends. The cooperative reports them on Form 1099-PATR. A farmer generally reports patronage dividends as income, on Schedule F, in the year received. They include money, the stated dollar value of qualified written notices of allocation, and the fair market value of property ^G5.
• Qualified notice. Publication 225 requires at least 20 percent of the patronage dividend in money or a qualified check, plus either cash redemption for at least 90 days with contemporaneous written notice of that right or the patron's qualifying consent to include the notice's stated value in income. These are alternative routes, not two cumulative conditions. Consent can be written, arise through membership after receiving the consent bylaw and notification, or arise through timely endorsement and cashing of a qualified check on the stated terms ^G5.
• Nonqualified notices. Per the Publication, they are not income when received, the basis is zero, and they are included at disposition ^G5.
• Personal purchases and capital assets. Publication 225 excludes dividends from nondeductible personal or family purchases from the taxable patronage amount, while requiring a cost/basis reduction. For business capital assets or depreciable property, basis reduction, amounts exceeding basis, and dividends connected with an asset already sold require the publication's separate rules and exceptions; do not treat every capital-asset dividend as categorically tax-free ^G5.
• The cooperative. The Form 1120-C instructions say a corporation operating on a cooperative basis under section 1381 and allocating amounts to patrons on the basis of business done with or for them should file Form 1120-C ^G4. See Understand cooperative tax basics.

Common mistakes#

1. Distributing before the bylaws are adopted.
2. Distributing without bylaws that prescribe how profits and distributions are shared between patron and other interests ^{P1, § 308B.721}.
3. Issuing patronage in a non-cash form without telling the member what it is. The statute lists the permitted forms ^{P1, § 308B.725, subd. 5}.
4. Leaving the patronage definition vague.
5. Not reporting to the members at the annual meeting.