Frequently Asked Questions
Who is eligible for the Farmers' Cooperative Tax Exemption?
Must be a farmers' or fruit growers' association organized on a cooperative basis where substantially all capital stock is owned by producers and dividend rates do not exceed 8% or the state legal interest rate.
How does the Farmers' Cooperative Tax Exemption work?
Farmers' cooperatives organized for marketing products or purchasing supplies are exempt from federal income tax, provided they distribute proceeds back to members and limit non-member business.
What law authorizes the Farmers' Cooperative Tax Exemption?
The Farmers' Cooperative Tax Exemption is authorized under IRC §521 of the Internal Revenue Code (Title 26, United States Code).
Statutory Text — IRC §521
Source: Internal Revenue Code, Title 26, United States Code
§ 521. Exemption of farmers’ cooperatives from tax(a) Exemption from taxA farmers’ cooperative organization described in subsection (b)(1) shall be exempt from taxation under this subtitle except as otherwise provided in part I of subchapter T (sec. 1381 and following). Notwithstanding part I of subchapter T (sec. 1381 and following), such an organization shall be considered an organization exempt from income taxes for purposes of any law which refers to organizations exempt from income taxes.
(b) Applicable rules(1) Exempt farmers’ cooperativesThe farmers’ cooperatives exempt from taxation to the extent provided in subsection (a) are farmers’, fruit growers’, or like associations organized and operated on a cooperative basis (A) for the purpose of marketing the products of members or other producers, and turning back to them the proceeds of sales, less the necessary marketing expenses, on the basis of either the quantity or the value of the products furnished by them, or (B) for the purpose of purchasing supplies and equipment for the use of members or other persons, and turning over such supplies and equipment to them at actual cost, plus necessary expenses.
(2) Organizations having capital stockExemption shall not be denied any such association because it has capital stock, if the dividend rate of such stock is fixed at not to exceed the legal rate of interest in the State of incorporation or 8 percent per annum, whichever is greater, on the value of the consideration for which the stock was issued, and if substantially all such stock (other than nonvoting preferred stock, the owners of which are not entitled or permitted to participate, directly or indirectly, in the profits of the association, upon dissolution or otherwise, beyond the fixed dividends) is owned by producers who market their products or purchase their supplies and equipment through the association.
(3) Organizations maintaining reserveExemption shall not be denied any such association because there is accumulated and maintained by it a reserve required by State law or a reasonable reserve for any necessary purpose.
(4) Transactions with nonmembersExemption shall not be denied any such association which markets the products of nonmembers in an amount the value of which does not exceed the value of the products marketed for members, or which purchases supplies and equipment for nonmembers in an amount the value of which does not exceed the value of the supplies and equipment purchased for members, provided the value of the purchases made for persons who are neither members nor producers does not exceed 15 percent of the value of all its purchases.
(5) Business for the United StatesBusiness done for the United States or any of its agencies shall be disregarded in determining the right to exemption under this section.
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