Frequently Asked Questions
- What is a patronage distribution?
At the end of each fiscal year, Farm Credit determines its total income and expenses. Income remaining after all expenses are deducted (the net income) can then be distributed in accordance with the association's bylaws. The board of directors can elect to retain all of the net income to strengthen the association's capital position, or distribute some, or all, of the net income to members by declaring a dividend on stock or declaring a cash dividend.
- How do patronage refunds benefit me?
One of the most important financial benefits of being a Farm Credit member-borrower is having the opportunity to share in the association's profits. Most businesses return their profits to their owners, not their customers. When you borrow from Farm Credit, you become an owner of the business and are therefore entitled to share in the profits of the association.
- How does patronage benefit Carolina Farm Credit?
Patronage refunds can help Carolina Farm Credit reduce our tax expense and maintain a strong capital position.
Unlike other corporations where profits are taxed twice, when earned by the corporation and when distributed to owners as dividends, a cooperative's profits are taxed only once when they are distributed as a patronage refund. Carolina Farm Credit is allowed a tax deduction for the amount of net income that it distributes in the form of a qualified patronage refund. Therefore, to effectively manage the association's tax expense and maintain a strong capital position, the board of directors may elect to distribute taxable earnings to members as a qualified cash dividend.
- What is allocated surplus?
Members, through the board, usually elect to leave a portion of the patronage refund in the cooperative to help keep us operating on a sound financial basis. The retained portion of each member's patronage refund is recorded on the books of the association, or allocated to each member's equity account. This retained patronage refund is called allocated surplus.
Qualified allocated surplus is a portion of the patronage refund retained for the purpose of providing for the capital needs of your cooperative. Farm Credit operates with a minimal stock requirement. This stock requirement is not adequate to maintain the levels of capital which are required to operate a safe and sound financial institution. Allocated surplus now provides that source of capital.
Carolina Farm Credit's goal is to operate efficiently and maintain a strong permanent capital base. It is the board's responsibility to continually monitor the financial position of the association. The board can vote to retire allocated surplus when it determines the association does not need it for capital. For loans made in 2015 and earlier, you will qualify for an allocated surplus. New customers will receive an all cash dividend.
- How is my patronage refund issued?
The cash portion of your patronage refund may be issued to you by check or recorded on the association's books in a special account. When any portion of a patronage refund is paid in cash, your board of directors may elect to set a minimum check amount as a means of controlling expenses. Cash distributions below the minimum check amount are recorded in a special account called patronage payable. On notification of patronage refund, refunds placed in patronage payable appear under "Not Distributed."
Members may request a check for monies in their patronage payable accounts, request that these amounts be applied to their loans, or leave these distributions "on account" with the association.
- Will I receive a tax notification regarding my patronage refund?
Yes. In January, Carolina Farm Credit will send you an IRS Form 1099. This form will show the total of all taxable patronage refunds issued to you during the previous year.
- What is the bottom line on patronage refunds?
The use of patronage refunds makes a significant reduction in your effective interest cost and saves you money. The next time you sit down and write a check to another lending institution, ask yourself a question, "How much of this interest payment will the bank be returning to me?" If your answer is "none," then maybe you should consider doing more of your business where you are a stockholder, like Carolina Farm Credit. Remember, when you choose us as your lender, you own the bank and share in the profits.