What is a Credit Union?
- The Credit Union Difference
- Benefits of a Credit Union
- Why Credit Unions are Tax Exempt
- Popular Myths about Credit Union Taxation
The credit union difference is evident every day in the service credit unions provide to their members, in the focus and direction as set by the board of directors, and in the credit unions’ commitment to community service. Here is a look at the many other differences between not-for-profit financial institutions and the typical banking organization:
- Credit unions are member-owned, non-profit financial cooperatives that offer a range of financial services to their members. Credit unions raise capitol through member deposits.
- Banks are for-profit, board and stockholder controlled, financial corporations that offer a wide variety of financial, investment, insurance, and real estate services to their customers.
- Banks have the ability to raise capitol selling stock.
- Credit unions are economic democracies. Each credit union member has equal ownership and one vote, regardless of how much money a member has on deposit.
- Bank stockholders hold influence in relation to the number of stocks they hold, with large stockholders entitled to a greater number of votes.
- Credit unions are governed by a board of directors, elected by and from the credit union’s membership, who serve voluntarily without pay.
- Bank boards are generally compensated for their services.
- The earnings of a credit union, minus operating expenses, are returned to the members in the form of higher interest rates on deposits and lower loan rates.
- The earnings of a bank, minus operating expenses, are divided among the stockholders of the bank.
- Credit unions do not pay corporate income tax on the earnings of the credit union, but do pay all other relevant taxes, such as payroll taxes.
- Banks do pay corporate income taxes on earnings, although there are many banks that also qualify for tax-exempt status under Subchapter S of the IRS Code. Currently 1,800 banks in the U.S, or 19% of all banks, now have Subchapter S status for avoiding taxes on corporate earnings.
- Congress and the Louisiana Legislature granted credit unions a tax exemption based on their unique structure as non-profit cooperatives and to provide financial services to those of modest means.
- Banks do not have a tax exemption because they are a for-profit business, intended to provide profits to their stockholders.
More than one million people in Louisiana currently belong to a credit union. You, too, can enjoy the benefits of joining a credit union. Credit unions provide a broad range of financial services and products, such as ATMs and online banking, with professional, personal service, fewer fees, lower loan rates and higher savings rates.
The benefits of joining a credit union include:
- Competitive Rates: Because credit unions are owned by their members, they return their earnings to you through reduced interest rates on loans, higher rates for on savings and fewer fees than other financial institutions. Click here for a side-by-side comparison of average Louisiana credit union and bank rates.
- Service: Credit unions are committed to superior service, which makes them a smart choice for anyone choosing a financial institution. At a credit union, you are not just a customer. You're a member.
- Security: Just like other financial institutions and banks, your deposits at a credit union are federally insured up to $250,000 by the National Credit Union Administration (NCUA). Individual Retirement Accounts or IRAs are separately insured to $250,000 each.
- Broad Range of Financial Services: Credit unions can provide great rates on checking, savings and CDs, and low interest on credit cards, auto and home loans. You can also enjoy a statewide ATM network and online banking through your credit union.
- Ownership: As a credit union member, you are an owner of your credit union.
- Credit unions pay the same share of federal, state, and local taxes as any business, including employment taxes. Our tax exemption only applies to corporate income tax because of the not-for-profit structure.
- Congress reaffirmed its support for the credit union tax exemption in 1998 by stating, “Credit unions, unlike many other participants in the financial services market, are exempt from federal and most state taxes because they are member-owned, democratically operated, not-for-profit organizations.”
- Credit unions do not stop behaving like cooperatives once they reach a certain size. Whether big or small, every credit union shares the same not-for-profit structure and orientation toward member service.
- Size and services are completely beside the point. The original reason for granting credit unions their tax exemption – their not-for-profit cooperative structure – is just as valid today as when the exemption was first granted.
- Cooperatives like credit unions typically do not pay income tax because they must pay all their income to their members. Credit unions, after transferring a portion of their income to reserves and loss accounts, must return all surplus earnings to the members as dividends, lower rates, and higher savings returns.
- Credit unions continue to be cooperative financial institutions, dedicated to meeting their members’ financial service needs, with a volunteer board and democratic control.
- Credit unions pass their savings on to members in the form of competitive interest and dividend rates, fewer or no fees, and convenience. Therefore, a tax on credit unions is another tax on consumers.
- Congress’ decision to exempt federal credit unions from income taxation was based on credit unions’ structure as not-for-profit financial cooperatives, which can build net worth only through retained earnings.
- Taxing credit unions’ retained earnings would result in reductions in net worth of credit unions. Federal law requires a credit union insured by the National Credit Union Share Insurance Fund (NCUSIF) to have a minimum net worth ratio of seven percent to be considered well capitalized.
- A tax on credit unions is a tax directly on the people the legislators most want to help – average working men and women trying to make ends meet in a difficult economy.
Congress exempted credit unions from paying income taxes because of their structure and purpose. Comparisons are often made between the tax treatment of banks, which do pay corporate income taxes, and credit unions. However, there are fundamental differences between banks and credit unions that justify this disparate treatment.
The basic reason that banks, like any for-profit corporation, are taxed on their income is because they have the option and ability to retain income at the corporate level. Cooperatives, like credit unions, typically do not pay income tax because they must pay all their income to their members. Credit unions, after transferring a portion of their income to reserves and loss accounts, must return all surplus earnings to the members as dividends, lower loan rates, and higher savings returns. Since credit unions cannot retain income at the corporate level, but instead pay distributions to members who are taxed, it makes just as much sense today as it did in 1934 to not impose a corporate income tax on credit unions.
It is important to remember that credit unions do pay taxes. Credit Unions’ federal tax exemption only covers corporate income tax. Credit unions pay all employment taxes, and sales taxes where applied. Our corporate profits are paid back to the members, as owners of the credit union, as dividends based on their share holdings or deposits.
Myth #1: “Credit unions are tax-exempt.”
Credit unions pay the same share of federal, state, and local taxes as any business, including employment taxes. The exemption only applies to corporate income tax, which, as explained above, makes sense since all income passes through to the credit union’s members.
Myth #2: “Tax-exempt status gives credit unions an unfair advantage.”
Any credit union’s lower loan rates and higher savings returns come from their structure and mission, rather than special tax treatment. Credit unions exist to provide financial services to their members, not to provide a return for a few shareholders’ investments. Dedication and service to the needs of members, rather than to the investment return of shareholders, is what gives credit unions their competitive edge.
Myth #3: “Credit unions no longer fulfill the mission for which Congress created them, so they should lose their exemption.”
Credit unions were created in 1934 to serve the financial needs of America’s consumers in a cooperative manner that would focus upon service to the member, not profit for the few. Congress reaffirmed this in 1998. Some credit unions have been so successful within this structure that they can provide their members full financial services, while the vast majority still identify their members’ greatest needs and try to meet only those. However, every credit union, large or small, still operates within the same structure reaffirmed by Congress in 1998: not-for-profit, but for service.