Understanding Form 1120-C and Form 1099-PATR is essential for accurately filing your taxes and qualifying for benefits like 521 exempt status. Here’s how they work and what they mean for your return.
If your ag operation functions as a cooperative, you’re required to file Form 1120-C as part of your tax return. And if you belong to a co-operative—like a farm coop—then you may receive a Form 1099-PATR during tax season, which impacts your individual tax return.
Whatever role you play in a co-operative, understanding Form 1120-C and Form 1099-PATR is essential for accurately filing your taxes and qualifying for benefits like 521 exempt status. Here’s what you need to know.
What is Form 1120-C?
Cooperatives use Form 1120-C to report their income, deductions, and distributions of patronage dividends. It also differentiates patronage sourced income (allocated to members of the co-op) and non-patronage sourced income (taxable at the cooperative level).
Patronage-sourced income: When patrons (members of the co-op) earn income through the co-op, that income is distributed to them in the form of dividends. They report the dividends as income on their personal tax returns. The co-op, as an entity, is not taxed on these earnings.
Non-patronage-sourced income: When non-patrons (individuals who are not members of the cooperative) earn income through the co-op, they do not receive distributions for dividends. Their earnings make up part of the co-op’s taxable income, which is taxed at the corporate rate.
Patrons of the co-op each receive a copy of Form 1099-PATR reporting their dividends. The IRS and state tax authorities also receive copies.
Form 1120-C vs. Form 1120-S
Form 1120-S is the tax form an S corporation submits for its tax return. A cooperative is not an S corporation—it’s a C corporation that qualifies as a co-op. An S corporation can’t qualify as a co-op.
This is an important distinction to make, since S corps resemble co-ops in some ways—for instance, in the way their income is passed through to individual shareholders’ tax returns. But if you run a cooperative, you need to file Form 1120-C and not Form 1120-S.
Form 1120-C vs. Form 1120
Form 1120 is the tax form a C corporation submits for its tax return. It reports income gains, losses, deductions, and credits for the C corp and calculates its tax liability.
A cooperative is a special kind of C corp that receives different tax treatment. When a cooperative files Form 1120-C, it does not need to file Form 1120.
Who needs to file Form 1120-C?
Any corporation qualifying as a cooperative under IRS Subchapter T must file a Form 1120-C.
To qualify as a co-op, a corporation must:
Operate on a cooperative basis, meaning members help to control its operation
Earn the majority of its income from business with members (patrons)
Maintain a system to allocate earnings to patrons
Have limited investor influence—voting rights are determined by membership, not by investment
Farm co-operatives are one of the most common forms of co-op in the US. A farm co-op may:
Market crops: Members combine their crops and sell them through the co-op, potentially earning higher income.
Provide supply inputs: Ag producers may form a co-op to purchase seed, fertilizer, and other supplies in bulk.
Process products: The co-op controls a facility which members use to process their products (eg. a cooperative of dairy farmers sharing the cost of a facility for making cheese).
Farm co-ops, like other co-ops, must file Form 1120-C, reporting member share allocations and dividends paid out to patrons.
What is included on Form 1120-C?
Form 1120-C is similar to Form 1120, but includes sections specific to co-ops.
When you complete a Form 1120-C, you include:
Basic info: Name, address, and employer identification number (EIN) of the cooperative; date of incorporation; assets at the end of the year; election as a qualified cooperative under IRS Subchapter T.
Income: Gross receipts or sales; cost of goods sold (COGS); gross profit; other sources of income (including non-patronage income).
Deductions: Ordinary business expenses such as salaries and wages, rent, utilities, and depreciation; patronage dividends paid or accrued; interest, tax, and other allowable deductions.
Tax and payments: Calculated tax on non-patronage income; tax credits; estimated tax payments made over the course of the year.
Allocation of dividends: How net earnings are allocated among members; amounts paid or credited; percentages based on patronage (how much business each member did with the co-op).
Balance sheet and other financial information: If required, a balance sheet may be included reporting assets, liabilities, and retained earnings.
Schedule G of Form 1120-C
Schedule G is one of the most important parts of Form 1120-C. It’s where the cooperative reports all patronage dividends paid to members. It distinguishes between patronage-sourced income and non-patronage income.
That’s important, because in order to qualify as a co-op under IRS Subchapter T, the majority of its income must be patronage-sourced and dividends must be accurately paid out to members.
Schedule G includes:
Information about members
Patronage dividends paid or credited to members
Allocation of net earnings
Any non-patronage income
How much may be deducted based on dividends paid
Does Form 1120-C require a balance sheet?
Form 1120-C must include a copy of Schedule L, a balance sheet, if either or both of the following apply:
The cooperative is reporting a net income of $250,000 or more
The cooperative has assets valued at $250,000 or more
Even if a cooperative is not required to file a balance sheet with Schedule L, it’s best practice to prepare a balance sheet for internal use.
Does a farmers’ co-op file Schedule K-1?
Schedule K-1 is used by S corporations and partnerships to report pass-through income for each of its shareholders or partners. Because a farmers’ co-op is a C corporation, and not a pass-through entity, it does not file Schedule K-1s.
Instead, a co-op reports all of its income—which is taxable at the corporate rate—and then deducts the amount paid out to members as dividends. It does that on Schedule G and by filing Form 1099-PATR.
Schedule 1120-C and Form 1099-PATR
Form 1099-PATR reports dividends paid to members. The amount paid out to each member is calculated on Schedule G. Then, each member receives a Form 1099-PATR reporting their taxable income.
One copy of Form 1099-PATR goes to the relevant co-op member, another copy to the IRS, and another copy to state tax authorities. The co-op also typically keeps a copy for its records.
Form 1099-PATR also includes information about dividends on capital assets or depreciable property, which may reduce the asset’s cost basis.
What is 521 exempt status?
Only cooperatives involved in agricultural and horticultural activities may qualify for IRC 521 exempt status. If a farmers’ co-op qualifies, its income from the sale of members’ agricultural products is generally not subject to income tax.
An 521 exempt co-op is different from a Subchapter T co-op. A Subchapter T co-op files income tax deductions based on patronage dividends it pays out to members. A 521 exempt co-op, on the other hand, is not taxed on its income at all.
Example: A subchapter T co-op earns $1,000,000 income, and deducts $900,000 for dividends paid out to patrons. It must still pay income tax on the remaining, unallocated $100,000.
A 521 exempt co-op earning the same income and making the same allocations would not pay taxes on the remaining $100,000, provided it was earned from the sale of agricultural products produced by its members.
The co-op must still file Form 1099-PATR, however, and members must report dividends on their tax returns and pay income tax on their earnings.
IRC 521 exemption requirements
To qualify for a 521 exemption, a cooperative must:
Qualify as a cooperative
File Form 1028 with the IRS
Operate for the mutual benefit of all members
Have a membership consisting only of agricultural producers
Return profits to members in proportion to their contributions
Not operate primarily for the benefit of outside investors
Keep in mind that this is a general overview. To make sure that your cooperative meets the requirements for 521 exemption, consult with an accountant and, if necessary, a lawyer.
Form 1028
To qualify for 521 exempt status, a co-op must file Form 1028. It’s a request to the IRS to be treated as a tax-exempt organization under IRC 521.
The IRS uses this form to determine whether a co-op is truly producer-owned, that it operates on a cooperative basis, and that it allocates earnings based on patronage rather than capital.
If the IRS grants your co-op 521 exempt status, you will receive a letter of determination confirming the fact.
Information reported on Form 1028 includes:
Organizational info: legal name, address, and type of entity
Description of activities: what the co-op does, the agricultural products involved, and how members use the cooperative
Membership requirements: whether members are producers
Patronage allocation method: how earnings are calculated and allocated to members
Treatment of non-member business: whether the co-op does business with non-members, and how that income is taxed or segregated
Financial info: financial reports, breakdown of member vs. non-member income, and investment income sources
Governing documents: articles of incorporation, bylaws, and membership agreements
How to file Form 1120-C
The filing deadline for Form 1120-C is March 15th (or the next business day if March 15th falls on a weekend or holiday).
Form 1099-PATR is due for delivery to patrons on January 31st. The deadline for submitting copies of 1099-PATR to the IRS is February 28th (paper forms) or March 31st (electronic submission).
You can complete and file Form 1120-C using an IRS-authorized e-file provider.
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This resource is provided for general informational purposes only. It does not constitute professional legal advice and may not apply to your specific situation. Consult with professional legal counsel before making any decisions about your business.
