Section 163(j) and Patronage Dividends Patrons Receive from Credit Cooperatives
The U.S. Department of Treasury (Treasury) and the Internal Revenue Service (IRS) provide taxpayers with an opportunity to suggest tax issues of general interest for which guidance would be helpful to taxpayers under a program called the Priority Guidance Plan. The National Council of Farmer Cooperatives (NCFC) sent a letter on May 30, 2024 recommending the issuance of guidance with respect to the treatment of patronage dividends received by a patron with business interest expense generated by debt financing issued by a credit cooperative. The Farm Credit Council (FCC) sent a letter on July 22, 2024 supporting the NCFC request.
A taxpayer patron subject to Internal Revenue Code (IRC) section 163(j), which may be an individual or entity taxed as a partnership, S corporation, C corporation or cooperative, becomes a patron of a credit cooperative upon executing a loan agreement for interest-bearing financing issued by a credit cooperative. A credit cooperative may be a member of the Farm Credit System, such as CoBank or an Agricultural Credit Association regulated by the Federal Farm Credit Administration. Other cooperative lending organizations include the National Rural Utilities Cooperative Finance Corporation and the National Cooperative Bank.
A taxpayer patron’s gross interest expense paid to the credit cooperative is business interest expense subject to section 163(j). The patron’s patronage dividend received from the credit cooperative is included in its gross income under section 1385(a)(1). Under the final section 163(j) regulations, the patron does not have a specific provision describing a procedure to net the patronage dividend from the credit cooperative with the business interest expense. This is even though under the facts of the credit cooperative lending arrangement, the patronage dividend represents a rebate from the cooperative on the business interest expense paid by the patron.
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