Credit co-op patrons could save on borrowing with proposed 163(j) guidance

Comment letters submitted by advocacy groups to the Department of the Treasury (Treasury) and the IRS on its 2024–2025 Priority Guidance Plan could provide an opportunity for taxpayers who are patrons of credit cooperatives to reduce borrowing costs if addressed.

The comment letters request guidance be issued to provide a patron may net a patronage dividend received with the associated business interest expense paid to a credit cooperative for purposes of Internal Revenue Code (IRC) Section 163(j). The tax law authorities cited for this requested guidance are twofold:

• Based on the conduit treatment for regulated investment companies (RICs) as provided in the Section 163(j) regulations, noting a similar judicial conduit treatment for patronage dividends of cooperatives.
• Under the established legislative and judicial theory of a patronage dividend functioning as a price adjustment or rebate on the business interest expense paid.

The National council of farmer cooperatives (NCFC) and National society of accountants for cooperatives (NSAC) both submitted comment letters on May 30, 2024, requesting the Treasury and IRS issue guidance with respect to the treatment of patronage dividends received by a patron with business interest expense subject to Section 163(j) generated by debt financing issued by a credit cooperative.

If addressed, the guidance from the Treasury and IRS could potentially benefit many farmers, fishers, and rural agribusinesses who rely on credit cooperatives for financing, and in many instances, these credit cooperatives are the only available source of financing.

Who is affected by the priority guidance plan?

A taxpayer patron subject to 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 for purposes of executing a loan agreement for interest-bearing financing issued by the credit cooperative.

For example, the 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.