Patronage dividend is a distribution a cooperative makes to its members from net earnings in proportion to each member's business with or work for the cooperative, rather than in proportion to capital invested.
Under Subchapter T of the Internal Revenue Code (§1388), a patronage dividend is paid on the basis of the quantity or value of business done with or for the patron, under an obligation that existed before the earnings were received, and is determined by reference to net earnings from business done with patrons. A cooperative can deduct qualifying patronage dividends, so those earnings are taxed once, at the member level, rather than at both the corporate and shareholder levels. Part can be paid in cash and part retained through written notices of allocation; for a qualified notice, at least 20 percent of the dividend must be paid in cash.
In a consumer cooperative, patronage is purchases; in a 📝Worker Cooperative, patronage is labor, commonly measured by hours worked or wages. California Corporations Code §12420(c), added by 📝California AB 816, allows a worker cooperative to make patronage distributions only to its 📝Worker-Member class, which keeps surplus with the people who do the work; holders of 📝Community Investor Shares earn returns on their shares instead. This is a general explanation as of 2026, not tax advice.