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.