What Is a Patronage Dividend and Are They Taxable?

A patronage dividend is a refund that a co-operative distributes to its members as a share of the co-op’s profits. Unlike a regular stock dividend, a patronage dividend is not a return on investment. Instead, it represents a rebate on the member’s purchases from the co-op during the previous fiscal year. Some cooperatives can deduct patronage dividends from their income to reduce their taxes. Tax treatment for members depends on whether the purchases were personal or business-related.

A financial advisor can explain how patronage dividends and other types of dividends could impact your finances.

Co-Operative Basics

Co-operatives resemble businesses except that the members who own them are usually also their customers. You can find co-ops in agriculture, electric power generation, retail and other market sectors.

Some are small, local retail operations selling food and other items to individual consumers in their community. Others are national in scope, with tens of billions of dollars in revenue and substantial profits. Many large co-ops have small businesses as their members.

According to National Cooperative Bank’s Co-op 100 report, the largest cooperative is CHS. An agricultural co-op owned by farmers and ranchers, it posted $39.3 billion in revenue in 2024. Other major co-ops include Dairy Farmers of America and Associated Wholesale Grocers, which caters to independent grocery stores. Together, the top 100 U.S. cooperatives generated a combined $323 billion in revenue in 2024.¹

How Co-Ops Pay Patronage Dividends

Many co-ops distribute patronage dividends to their members, usually annually, as a way of sharing the co-op’s profits. The amount of the dividend depends on the number of purchases the cooperative member has made over the prior year. For instance, a retail grocery co-op may rebate 10% of the amount a member has spent on groceries. Patronage dividends may be in cash, store credit or other forms.

Patronage dividends differ from regular stock dividends paid by a corporation. The size of each regular corporate dividend payment works on a per-share basis. Owners of more shares receive more. Patronage dividends are based on patronage, not ownership. Co-op members who spend more at the co-op get more dividends, regardless of the size of their investment in the co-operative. However, non-members of the co-op do not receive patronage dividends.

Taxing Patronage Dividends

Tax treatment is another way patronage dividends are different. Shareholders who receive corporate dividends pay taxes on the dividends as ordinary income. Patronage dividends work differently and their taxes depend on the reason for the underlying purchase.

When a patronage dividend relates to personal or household purchases, such as groceries bought at a retail food co-op, the IRS treats it as a price adjustment or rebate rather than taxable income. The IRS treats store coupons or cash-back rewards in a similar fashion. It doesn’t consider it income because you receive your own money back on something you already bought for personal use.

The IRS treats a patronage dividend as ordinary income when it relates to purchases made for business purposes. Think of a farmer buying feed or equipment through an agricultural co-op. The IRS treats the dividend as taxable income because the farmer likely deducted the original purchase from their taxes as a business expense. Taxing the resulting dividend prevents a business from deducting the full purchase price and then also receiving a portion of that money back tax-free.

Another tax difference affects the payers of the dividends. Corporations cannot deduct regular dividends, but co-ops can deduct patronage dividends as business expenses. For this reason, while co-ops can pay regular stock dividends, most opt to pay deductible patronage dividends.

Reporting Patronage Dividends

The IRS requires some co-ops to report patronage dividends on Form 1099-PATR. Co-ops have to file this form for every person who received at least $10 in dividends and who is subject to backup withholding.

If a co-op reports patronage dividends on a Form 1099-PATR, the co-op has to send a statement to the recipient of the patronage dividend. If the recipient is a business, the patronage dividends will be reported on Schedule C. Farmers usually report patronage dividends on Schedule F. However, patronage dividends received from purchases of personal or family items are not required to be reported.

How to Know Whether Your Patronage Dividend Is Taxable

Determining whether you owe tax on a patronage dividend starts with reviewing the underlying purchases. If you’re a member of a consumer co-op, such as a grocery, hardware or credit union co-op, and your dividend relates to everyday personal purchases, it’s typically not taxable and does not need to be reported on your return.

If you’re a farmer, rancher or small business owner who purchases supplies, equipment or services through a cooperative as part of running your business, any patronage dividend tied to those purchases is generally taxable income, even if you receive it in a form other than cash, such as a written notice of allocation or equity credit.

Your Form 1099-PATR, if you receive one, can help clarify which portion of your dividend may be taxable, though the form itself does not always distinguish between personal and business use. Keeping records of what you purchased through the co-op and why can make it easier to report your dividend correctly, and a tax professional can help you sort out mixed-use situations, such as a farm co-op member who buys both business supplies and personal groceries from the same cooperative.

Bottom Line

Patronage dividends are rebates that co-operative organizations pay to their members who make purchases. Patronage dividends are calculated based on purchases rather than ownership. That is one thing that makes them different from regular stock dividends. Tax treatment also depends on the purpose of the underlying purchase: dividends tied to personal purchases are generally not taxable, while dividends tied to business purchases are typically treated as ordinary income.

Tips for Investing

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