Taxation
As not-for-profit cooperative financial institutions, credit unions are exempt from income taxes. The tax exemption of credit unions has become a perennial target of banks and often makes their list of top legislative priorities.
- Why Are Credit Unions Tax-Exempt?
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In 1937, Congress granted credit unions their federal tax-exempt status based upon their not-for-profit cooperative structure. Even though credit unions have had to evolve over the years, offering expanded products and services and growing fields of membership, credit unions continue to operate as democratically controlled cooperative institutions, on a not-for-profit basis.
Congress reaffirmed its support of the federal tax-exemption on several occasions, most recently in 1998 with the enactment of H.R. 1151, the Credit Union Membership Access Act.
- Do Credit Unions Pay Any Taxes?
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Credit unions do pay taxes. They pay payroll taxes, real estate taxes, and some other property taxes.
- Credit Unions Offer The Same Things As The Bank That I Use. Shouldn't They Be Taxed The Same?
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The tax exemption was granted based on the structure of credit unions and not on the products and services they offer. Credit unions do not answer to shareholders, but to their members. Earnings are returned to the members in the form of lower interest rates on loans, higher dividend rates on shares, or other no-cost or low-cost services. In addition, credit unions are governed by democratically elected volunteer representatives from the membership.
- What Happens If Credit Unions Are Taxed?
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If credit unions are subjected to the federal income tax, they will be forced to pass on those costs to their members in the form of higher interest rates on loans and lower dividend rates on shares.
Even non-credit union members would feel the effects of credit union taxation because the main driver of competition on rates would be eliminated, thus providing other financial institutions with little incentive to keep their rates competitive.