As a member of Coteau Community Market, you are one of many owners of the market. This means that, in addition to supporting the market by investing in it, you also get a share of the profits in years the market is profitable.
How does it work?
Once a year, the Board of Directors figures out if the market made a profit. They then figure out how much of the annual sales were made to members and how much to non-members.
How much you spend over the year at the market will determine what percentage of the profits you will receive. (The more you spend--your patronage of the market--the more you will get back.)
Your purchase total over the year is divided by the total sales made by all members. The result is the percentage of the member profits that will be returned to you. Eighty percent of your refund total will be reinvested in the market in your name. This is one of the ways you continue to invest in the co-op (by contributing member equity) and help it to be financially stable.
The remaining twenty percent of your total patronage refund will be credited to your membership account for use on future purchases at the market.
In this example, the annual sales at the co-op are $1.2 million, with $750,000 of that being qualified purchases made by members (62.5%). The board determines the net profits (profits after all expenses are taken into account) for the year are $400,000, so 62.5% ($250,000) of those profits will be distributed among members as patronage refunds.
Co-op member Jane Doe spent $4,800 in the market that year, which is 0.64% of the member sales total. Her total patronage refund is $1,600 (0.64% of $250,000). Of that refund, 80% ($1,280) will be retained by the co-op in her name as Class A stock, and the other 20% ($320) will be credited to her membership account, which she can use to make more purchases at the market.
|What||Amount||Showing our work|
|Total annual sales||$1,200,000|
|Member sales total||$750,000|
|Member sales percentage of total sales||62.5%||$750,000 ÷ $1.2 million|
|Net profits||$400,000||Amount remaining after all expenses are accounted for|
|Member profit total||$250,000||$400,000 x 0.625|
|Member Jane Doe's annual purchase total (her patronage of the market)||$4,800|
|Jane's percentage of member sales total||0.64%||$4,800 ÷ $750,000|
|Jane's patronage refund total||$1,600||$250,000 x 0.0064|
|80% retained by co-op in Jane's name as Class A stock||$1,280||$1,600 x 0.8|
|20% credited to Jane's member account as market credit||$320||$1,600 x 0.2|
What happens to the other $150,000 in profits (the non-member percentage of sales)? It's retained by the co-op and considered taxable income for the co-op.
Why the 80/20 split?
In short, the IRS requires a minimum of 20% of member profits to be distributed to members in the form of cash or store credit. Rather than varying the split each year, the board has established a policy using the IRS requirements.
The $250,000 in member profits in the example above is not taxable, for both the co-op and members, provided that every member claims their twenty percent refund within ninety (90) days. In the example above, if Jane Doe received her $320 refund as a check but didn't cash it, her full $1,600 patronage refund becomes taxable and the entire amount reverts to the co-op (it no longer belongs to Jane).
That's why the board has established the policy of returning the 20% refund in the form of market credit, because it both eliminates costs associated with printing and mailing checks to members and ensures that those refunds will be used by the members. Members are allowed to receive a cash distribution rather than the market credit, per IRS rules, but the distribution will be made in person at the market and not by mailed check.
Why does the co-op retain patronage refunds?
In short, this is the way the co-op becomes financially stable, lessens outside debt, helps the local economy, and allows the market to grow. If the co-op reaches several million in retained member equity, the amount we'd need to raise to expand the market's services or to build a new location would be that much less. (Say a new building would cost $5 million, but the co-op has $3 million in retained patronage refunds. We'd only need to raise $2 million instead of $5 million to make the new building a reality.)
What's the benefit to the co-op retaining patronage refunds?
It actually has a four-fold benefit:
- The market continues to be solvent and financially stable and can expand services.
- You receive a refund on money you're already spending on groceries.
- Reinvesting part of that refund (the 80%) is at no additional cost to members--it's not extra money you need to come up with to continue contributing equity to the co-op.
- The market credit part of your refund (the 20%) is extra grocery money you wouldn't have had otherwise.
Needless to say, if you have any questions about tax laws, patronage refunds, and co-ops, ask a tax professional. This information is provided to members of Coteau Community Market as a way to explain how patronage refunds generally work. We are neither lawyers nor CPAs, and no guarantee is made about the accuracy of this content.