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Understanding Book Credits

As a grower-owner of PCCA, you share in the profits of the company. The money that is paid back to the membership is done so by way of patronage dividends. As your cooperative sends out year-end patronage dividends, information regarding dividends, book credits and retirements seemed fitting for this issue.

What are book credits at PCCA?

Book credits are a grower-owner’s investment in PCCA. It is money that is held as equity on the balance sheet of the co-op. Holders of book credits or equity at PCCA, or any cooperative, are owners of that business.

What is an allocation of book credits?

How are book credits, or equity, created? At the end of each fiscal year, any margins remaining after all expenses are paid are allocated as a patronage dividend back to the members that patronized PCCA during that fiscal year. PCCA’s fiscal year ends June 30. Each year, a financial audit is completed to validate the results of the fiscal year. Then PCCA’s Board of Directors determine how much the year’s dividend will be. That dividend is allocated back to the members/users of PCCA on a patronage basis. This means the amount of the total dividend each member receives depends entirely on how many bales of cotton or pounds of lint he or she markets or stores with PCCA during the year. Patronage dividends are allocated separately for each division of PCCA. The divisions at PCCA are: Marketing, West Texas/Oklahoma/Kansas Pool, South Texas Pool and Warehousing. Each member’s dividend is calculated according to their level of patronage in each division. This results in each member having a book credit balance only in the divisions he or she utilizes. Dividends are allocated on a per-bale basis for the Marketing and Warehouse divisions. The dividends for both pool divisions are allocated on a per-lint-pound basis. Each year’s patronage dividend is issued to payees as part cash and part book credits, or equity. These book credits are your investment in PCCA. They are yours and have your name on them. They represent your ownership in PCCA, and the goal is to retire or pay them to you in the future as future years’ margins allow.

How are my book credits used at PCCA?

Cooperative book credits are treated as equity on the balance sheet of PCCA. It is money from prior year margins that the owners have invested back into the company. PCCA uses this money for operating funds and capital expenditures. Every business must show some level of equity to remain viable to business partners, lenders, etc. In a cooperative, part of that equity comes from retaining this portion of the yearly dividend allocation.

Book credits and taxation

With a cooperative patronage dividend, the cash portion is always taxable and will be included on a form 1099PATR issued to the payee/member in January following the year the dividend was paid. The book credit portion of the dividend is also taxable, however, when it is taxable can differ depending how the book credits are issued. If book credits are issued as “qualified” it means that amount of money is taxable in the year it is issued to you as a dividend. So, if you receive a dividend in 2019 that totals $200, and is paid to you as $100 cash and $100 qualified book credits, you will receive a 2019 1099PATR from the co-op totaling $200. In other words, you pay income taxes on the entire patronage dividend amount, the cash and the book credits in the year the dividend is issued. When that $100 qualified book credit is retired to you in a future year you do not pay taxes again on those dollars. If the 2019 $200 dividend was issued as $100 cash and $100 “non-qualified” book credits, the resulting 2019 1099PATR would only be for the $100 cash portion. The non-qualified book credit amount is not taxable to the recipient until it is retired or paid in cash to the member. So, if that non-qualified book credit that was issued to the member in 2019 is retired, or paid, to the holder in a future year, they will receive a 1099PATR in that year for $100. So that member was taxed on the $100 cash portion of the dividend in 2019 (year of issue) and they were taxed on the $100 non-qualified book credit portion in 2026 (year of retirement). Remember, when it comes to cooperative book credits you receive a 1099PATR and pay taxes only once, either when the book credit is issued (qualified) or when the book credit is retired to you (non-qualified). Currently all book credits at PCCA have been allocated as qualified with the exception of the 2013 crop year, which was allocated as nonqualified. Because PCCA, like any cooperative, must report patronage dividends to membership on the IRS form 1099PATR we must have each member’s correct social security number or entity tax ID. This is also why we must have a signed IRS form W-9 on file for each member.

What is a book credit retirement?

As long as a cooperative is financially healthy, it does not hold members’ book credits or equity forever. Each year, PCCA’s Board of Directors decide how much of member’s book credits to retire. PCCA’s Marketing and Pool divisions use a revolving equity cycle to retire book credits. Under a revolving cycle, the oldest outstanding equities by crop year in each division are retired first. A crop year’s equities can be retired in total, or a percentage of the total. In this manner, the equity for these divisions is provided by those individuals that have most recently patronized the cooperative. The Warehouse Division utilizes a base-capital plan to accumulate and retire equities. The base capital plan uses average deliveries and a per-bale equity amount to establish an equity target for each member delivering to a PCCA warehouse. Any book credits accumulated over the equity target by member is then retired on an annual basis. Due to the variability in production in the Warehouse Division trade territory, the base capital plan provides more equitable method to finance the long-term assets required by these operations.

Can I get an early retirement?

At PCCA, the book credits to retire are set by the Board of Directors at the end of each fiscal year. Typically, early retirement of a member’s book credits is not allowed.

What happens when I quit farming/owning land or am no longer an active member of PCCA?

If you retire from farming and/or stop being a landlord, or in any other way stop being an active member of PCCA, the book credits you have earned and invested in the co-op stay in your name. When your years’ of book credits are up for retirement, a check will be sent to you.

What happens to my book credits if I pass away?

When a member of PCCA passes away, any book credits he or she has accrued can be handled in one of two ways. They can either be transferred to the heir(s, or they can be paid out to the heirs of the deceased member. If a transfer is desired we need a copy of the death certificate, letters testamentary, and instructions from the executor stating who to transfer the book credits to. If a payout of the deceased’s book credits is desired, we will need a copy of the deceased’s death certificate, letters testamentary showing who the executor of the estate is, and instructions from the executor as to how the payout should occur. Payouts of a deceased member’s book credits is limited to the greater of 1/5th of the value at date of death or $5,000 on an annual basis.

Book credits are your investment in PCCA from prior years’ patronage, and your name is attached to this balance. For this reason, please keep us informed of any change in address you have. PCCA sends patronage and book credit balance information to all members each year in September. Up-to-date contact information is vital to PCCA’s communication efforts with the membership. If you ever have any question regarding book credits or member equity, please call PCCA’s Cotton Services Department.

Finally, if you are a grower-owner of PCCA, please remember that our Member Access System is a very useful tool. Member Access will show patronage levels by crop year, patronage dividend statements in summary and detail form, book credit/equity balances, and IRS form 1099PATRs issued by PCCA. All of this information can be found under “Ownership Statements” within Member Access. You can get to Member Access by going to services.pcca.com/MemberAccess. If you need any assistance with Member Access or setting up an account, please give us a call.

Dividend Breakdown

  • You market or store your cotton through PCCA throughout the year.
  • At the end of the fiscal year, any margins remaining after all expenses are paid are allocated as a patronage dividend back to the members that patronized PCCA.
  • This dividend is allocated back to the members of PCCA on a patronage basis – meaning the amount the member receives depends entirely on how many bales of cotton or pounds of lint he or she markets or stores through PCCA during the year.
  • Dividends are allocated separately for each division of PCCA. The divisions are Marketing, West Texas/Oklahoma/Kansas Pool, South Texas Pool and Warehousing.
  • Each year PCCA’s Board of Directors decide how much of member ‘ book credits to return to membership as stock retirements.