Newsletters for April 2012
By: Dennis Gardiner, Partner | email
Our cooperative clients have been very successful for the past several years. The result of these profitable years, the use of the Section 199 deduction and bonus depreciation have helped to strengthen coop balance sheets. But is it enough? The cost of mega-fertilizer plants, speed and space in grain storage, and the race for securing bushels, is beginning to strain balance sheets. Are you going to have to pass on opportunities, or set projects on the back burner to allow them to fit into your long-term capital expenditures budget?
Because of some of the issues cited above, we have seen an uptick in the interest in the Limited Cooperative Association organizational structure. Also, due to the success of the ag-sector, we are learning of an interest in outside investors to place equity in farmer cooperatives. Unfortunately, almost all of you would not be able take these dollars today. The time may be here to consider investigating a conversion to a Limited Cooperative Association. For Gardiner Thomsen clients in Iowa, Minnesota and Nebraska these laws have been adopted.
The Limited Cooperative association structure would allow you the flexibility to accept outside investor equity. The outside equity may afford your cooperative the advantage of timely opportunities or to balance your debt and equity capital structure. We are not encouraging this structure for all of our cooperatives, but we have seen enough through the last 48 years to know that it is worth considering; particularly as our cooperative clients continue to grow. We are not attorneys, so we would have to direct you to the legal resources to address the details. Contact your Gardiner Thomsen partner or manager if you would like to start the discussion.
By: Dave Thomsen, CPA, Partner | email
One of the best parts of working with our cooperative clients is helping them with the annual decision of how much of their earnings to allocate back to members as patronage dividends. There are rules to follow in order to protect the ability to deduct the allocation for income tax purposes. Many items come into play, such as: is the cooperative “exempt” or “non-exempt” for tax purposes, will patronage dividends be in the form of “qualified” or “non-qualified” allocations, and is the allocation based on “book” income or “tax” income.
Most of our clients have historically based their patronage dividend allocations on a tax basis, and there are several book/tax differences that can have a big impact on the patronage dividend computation. Some of these differences are temporary while others are permanent, and many of you have seen the significant effect they have had on recent patronage dividend and income tax computations at your cooperative. Several of the more common book/tax differences we work with on an annual basis and how they are handled differently for book and tax purposes are as follows:
|Depreciation||Deduct over useful life||
Deduction based on tax tables, Section 179, bonus depreciation
|Section 199 – DPAD||N/A||Deduct as computed, often limited by wages|
|Inventory capitalization – 263a||N/A||Capital certain purchasing, handling and storage costs|
|Inventory reserves||Deductible when established||Not deductible|
|Bad debt reserves||Deductible when established||Not deductible|
|Meals & entertainment||Deduct in full||50% deductible|
|Lobbying/political contributions||Deduct in full||Not deductible|
|Accrued salaries, bonuses and vacations||Deduct in full when accrued||Deduct if paid within 2 1/2 months of year end|
|Pension costs||Deduct as paid or accrued per actuarial computations||Deduct as paid|
|Nonqualified allocation issued||Increase in members' Equity||Not deductible until redeemed|
|Nonqualified allocation received||Recognize as income||Income deferred until redeemed|
We will continue to work with you to help you understand the effect of these differences between your audited financial statements and tax return, and the effect they have on your patronage dividend computation. In the meantime, if you have questions or would like to discuss some patronage dividend and income tax planning prior to your year end please let us know.
By: Mark Rodruck, CPA, Partner | email
On June 16, 2011, the FASB issued ASU 2011-05, eliminating one of the three existing presentation options for other comprehensive income and requiring reclassification adjustments to be reported on the face of the financial statements rather than in the notes as currently permitted. For non-public entities, this amendment is effective for fiscal years ending after December 15, 2012 and is to be applied retrospectively. If no items of other comprehensive income are present in any of the years presented in the financial statements, this standard does not apply.
The new standard eliminates the option of presenting comprehensive income in the “statement of changes in members' equity,” which leaves the following two options:
1) Presenting in a single-statement format. In this format, comprehensive income is reported in two sections: net income and other comprehensive income. It must also include the components of net income, a total of net income, the components of other comprehensive income, a total for other comprehensive income, and a total for (overall) comprehensive income.
2) Presenting in a two-statement format. In this format, the reporting entity must present the statement of other comprehensive income immediately following the statement of net income. Using this approach, the income statement would not change while the statement of other comprehensive income, which often begins with net income, should present the following: the components of other comprehensive income, a total for other comprehensive income, and a total for (overall) comprehensive income.
By: Mark Rodruck, CPA, Partner | email
Over the past few years I have heard many different opinions in regard to patronage allocations, ranging the gamut from: “The members don't want to accept patronage allocations,” to “Cooperatives must allocate patronage earnings.” More specifically, I have hear that members want earnings reinvested for bigger and better facilities, more efficient equipment and the most recent technologies rather than receiving patronage earnings from their local cooperative. Before deciding to dole out patronage allocations or reinvest those earnings, cooperatives must consider the tangible and intangible values that each option holds.
Patronage allocations, one of the defining attributes of cooperatives, return equity to the members of the cooperative. Patronage allocations take different forms such as cash, deferred-qualified allocations and deferred non-qualified allocations, as well as deferred equity and deferred equity retirement. Each of these forms of allocation comes with its own set of challenges and responsibilities, and can hold different values for the cooperative, and the member, depending on what goals are to be achieved.
Receiving a check from a cooperative reminds members why they do business with their local cooperative. It is perhaps the most effective marketing tool that a cooperative has.
To be a qualified allocation, at least 20% of the allocation must be paid in cash, the cooperative must deduct the allocation from its earnings, and the member must include the entire allocation in their taxable income.
Non-qualified allocations are done with deferred equity, where the cooperative does not get a tax deduction for the allocation and the member doesn't include the allocation in their taxable income until the cooperative pays the allocation out in cash.
Deferred equity shifts some of the capital requirements from the cooperative's lender to its members, and deferred equity retirement can be used as a tool to generate goodwill among members and patrons.
In the past few years many cooperatives have been retaining more of their patronage earnings and allocating less to the members. There are many reasons a cooperative may want to do this including, but not limited to; pressure from lenders to increase working capital and the need to increase storage space for grain and fertilizer.
In the end, unfortunately, there is no magic one size fits all answer. Each cooperative must look at their current and future needs to determine which path, in the patronage road, they feel best fits their cooperative and meets the needs of their members.