§521 Exemption of Farmers’ Cooperatives From Tax

Summary

Farmers’ cooperatives that follow certain rules do not have to pay federal income tax, except where special rules in subchapter T apply. Even when subchapter T applies, these co-ops are treated as income-tax-exempt for other laws that refer to tax‑exempt organizations. An exempt co-op is one organized and run on a cooperative basis either to market members’ farm products and return the sales money (minus marketing costs) based on how much each member supplied, or to buy supplies and equipment for members and pass them along at actual cost plus necessary expenses. The law also says a co-op can have capital stock if dividends are fixed at no more than the higher of the state’s legal interest rate or 8% per year, and most stock is owned by the producers who use the co-op. Reserves required by state law or reasonable reserves are allowed. Co-ops may serve nonmembers up to the value of member business, but purchases for people who are neither members nor producers cannot exceed 15% of total purchases. Work done for the U.S. government does not count against these rules. Co-ops may compute losses and net earnings as described in section 1388(j)(1). For rules about value-added processing of animals, see section 1388(k).