What are “capital credits”? How do they benefit me?
These are two questions you probably have when learning about your cooperative. Capital credits are the maximum possible value for your rate dollar, and your share in the development of an expanding, progressive enterprise that is an active partner in the growth of the area you call home.
The members of the cooperative earn equity each year from the profits of the business. These profits are termed margins and are allocated to the patrons buying power that year. In essence, these retained earnings displace the need for a portion of otherwise debt financing.
In a cooperative, capital credits, like debt, need to be paid back to the lender. The lenders of debt are Rural Utilities Service (RUS), Cooperative Finance Corporation (CFC), Federal Finance Bank (FFB) and CoBank. The lenders of equity are the customers who are paid back on a rotation basis with no interest. This is why the patrons are in essence equity owners of the cooperative. The value of your equity is realized in the reduced cost of operation with this type of financing.
Each year active members receive credit on their July 31st billing statement and inactive members receive a Capital Credit check based on a percentage of prior years earnings. In the event of a members death the estate can continue to receive an annual check or cash out the capital credits at present value.
It becomes a fine balance to maximize equity growth to obtain the lowest interest on loans, while attempting to return capital credits and maintain the lowest possible rates on the energy our members purchase.
If Wild Rice Electric could not use the members’ equity or “capital credits” to fund construction, we would have to borrow the funds. The additional interest expense on this debt would raise rates. Looked at that way, you do get a lot of value in exchange for allowing the cooperative to use your share of the margins.
Are your capital credits taxable?
Under the current law, no part of the capital credits allocated to you by Wild Rice Electric are taxable until actually paid. When you actually receive a capital credit retirement, it is subject to taxation only to the extent that your electric costs were deducted as an expense on your income tax return for the year the credit was allocated.
For example, a farm or other business claiming 75 percent business use of their electric costs would have to include 75 percent of the cash payment for the capital credits when received as income. The non-business portion is not subject to taxation.
Wage earners who take no deductions for electric costs would not have to show any of the cash retirement as income.