Patronage Overview
Patronage is an annual determination of the amount of a co-ops net income for patronage for the previous fiscal year to be distributed to its members. The patronage a member is eligible for is calculated using the members patronage sales compared to the co-ops total patronage sales. Sales to non-members of items in Item Categories flagged for patronage is considered retained earnings for the co-op.
The co-ops bylaws dictate
- The income figure used as net income for patronage, either booked or taxable income.
- The amount of minimum member patronage
- The minimum check amount
The Coop board decides the amount of the net income for patronage to be distributed as patronage. The board also decides the percent of patronage to pay as cash, if paying, and can be any amount at or above the 20% required minimum. Any remaining patronage due to a member will be retained on their account as either Qualified or Non-Qualified Reserve.
The process for Locations choosing to use Patronage by Division can be found here.
Steps to Calculate, Assign and Pay Patronage
- Review Customers without W9s report
- Calculate Patronage Sales
- Review Patronage Sales report
- Assign Patronage
- Transfer Patronage
- Run Patronage Liability report
- Write Patronage Checks
- Run a Patronage Status report
Additional Options
Create a Patronage Category List report to review all Item Categories flagged for Patronage.
Reset Patronage is available and should only be used if errors are found on the Patronage Liability report. This option re-sets the process and removes all information from member accounts for the current year. This option is not available if patronage checks have been generated.
Prerequisites
Merchant Ag FIN
The Backup Withholding Rate, typically 28%, can be reviewed by navigating to Admin > Installation > Access Parameters > Company.
If applicable, the Exempt Patronage checkbox may be selected if the location is exempt from paying taxes on paid patronage. In this instance, all net income for patronage is paid to customers, both members and non-members.
Access to all applicable users is set in Access User Profiles found in > Admin > System Security > Access User Profiles > select a User Profile > Security > Accounts Receivable > Main Menu > Patronage/Equity for all appropriate permissions.
Merchant Ag PM
Customers
In Customer detail, the Pay Patronage checkbox in the Billing Address of a customer account indicates the customer is eligible to receive patronage. This must be selected to set a customer as eligible.
Type is customarily set to Member Voting or Member Non Voting for the customers eligible to receive patronage.
Use the Patronage Group as a method of grouping customer accounts together when generating patronage checks.
Customer information on the Credit tab for the account must include a SSN or EIN in the Tax Number and Type field must be entered.
The checkbox for W-9 on File should also be selected.
Supply the 1099-PATR Name for the account on the Info-Settings tab. Use the group field to assign a Group which can be used on the Patronage Sales, Patronage Status, and Patronage Liability reports. Be aware that an end of year 1099 is needed if patronage is being paid. It is not needed if patronage is calculated for members but not paid.
Item Categories
Select the checkbox for Patronage in Setup > Item Categories to track sales.
Steps to Calculate, Assign and Pay Patronage
1. Run and Review the Customers Without W9s Report
Identify the Customers with Pay Patronage selected but the W9 checkbox is not selected. Customer accounts should be corrected before moving to the next step.
2. Calculate Patronage Sales
Determine the total Patronage sales totals for all members of Co-op for the stated fiscal year. This total appears in Customer detail > Equity and is used to determine the patronage/refund the member is eligible for by using the members patronage sales compared to the co-ops total member patronage sales. See the example for Coop ABC below.
Split Patronage
After Patronage sales have been calculated, for customers who have more than one account and want patronage paid to a single account use a Split to multiple or one customer account. Two options are available to Split Patronage for a member account either by using within the Equity grid or by pre-defining Splits using the Patronage Splits tab.
3. Run the Patronage Sales Report
This report displays the total sales of all item categories marked Patronage for all customers. Columns on the report define
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and the total sales of item categories appears in each. This provides confirmation of the Type set on customer accounts and their patronage sales.
When running this report, the Patronage and Non-patronage Sales column in Customer detail > Equity is populated with their total sales.
4. Assign Patronage
This process defines
- Percent to Pay - how much of the member refund/patronage will be paid. This percentage will be a minimum of 20%.
- Minimum Check Amount- the minimum check amount to be issued
- Minimum Member Patronage - the lowest amount of refund/patronage calculated for a member eligible to receive a patronage check.
- Adjusted Net Income for Patronage - the yearly amount of Adjusted Net Income for Patronage
The amount of patronage/refund due the member appears in the Refund column found in customer detail > Equity.
How Patronage Appears in Customer Accounts
If the calculated patronage for a member is below the amount of minimum member patronage as set by the co-ops bylaws, it is considered Retained Earnings for the co-op as taxable income. This amount is not paid to the member but is notated on the customer account on the Equity tab.
When the calculated Patronage amount is above the minimum member patronage and above the minimum check amount, the balance remaining appears on the members account as Qualified Allocated Reserve to be paid at a later time. This is taxable income for the member when calculated but is not taxed when paid. Qualified Allocated Reserves can be retired either by year, for a specific year or by percentage, where a percentage of every years Qualified Allocated Reserve is retired. This can be combined with the patronage paid in the current year.
When a members patronage amount is above the minimum member patronage but below the minimum check amount, it appears on the members account as Non-Qualified Allocated Reserve to be paid at a later time. This amount is considered taxable income for the co-op when calculated and is taxable for the member when paid.
Merchant Ag does not automatically create a General Ledger entry for recording either Qualified or Non-Qualified Allocated Reserves, a manual entry must be entered if one is needed. The example below for Coop ABC displays how the refund is calculated for a member.
6. Run Patronage Liability report
Use the Patronage Liability report to view the Retained Earnings, Refund, Total Paid and amounts of Qualified and Non-Qualified Allocated Reserve for all members.
7. Write Patronage Checks
Create Patronage checks for members. Be aware that no additional corrections or adjustments can be entered once patronage checks are written.
After checks are created, the Total Paid column on the customer account displays the amount issued to the member. The Checks Written tab includes additional details about the check included the TTR and if the check included Qualified or Non-Qualified Allocated Reserve.
General Ledger Entry
As Patronage checks are written, the GL entry in Merchant Ag is below.
Credit - Bank Account
Debit - Patronage Payable
8. Run a Patronage Status report
Create a Patronage Status report to review all member patronage information for the selected year.
Example for Coop ABC Patronage for 2018
Calculating Patronage for Members
Net profit for Patronage | $ 1,000,000 |
Total member sales, all item categories marked as Patronage | $ 500,000 |
Total non-member sales for item categories marked as Patronage | $ 500,000 |
Member A Patronage Sales | $ 10,000 |
The non-member sales, $500,000 are considered Retained Earnings for Coop ABC.
To calculate the refund to the individual member, obtain the usage for the member.
Member A Patronage Sales divided by Total Member Sales
10,000/500,000 = .02 or 2%
Refund/patronage to this member is calculated using their usage for the year multiplied by their member sales.
10,000 * .02 = 200