Home > Credit Union Philosophy > What does it mean that credit unions are “not-for-profit” and how does that affect their tax status?

Question: What does it mean that credit unions are “not-for-profit” and how does that affect their tax status?

Answer: Credit unions are cooperative financial institutions that exist to serve their members and communities. Because they are member-owned, credit unions are not driven to turn a large profit for a select group of stockholders. This directly affects the way credit unions do business. They can afford to charge lower fees and offer less profitable services like loans for small amounts to all their members. And, credit union members benefit through low rates for borrowing, high rates for savings, and (in some cases) receive a dividend payment at the end of the year.

While their not-for-profit status means that credit unions pay no corporate taxes on their earnings, they do pay property and payroll taxes. And, credit union members also pay state and federal taxes on any dividend they earn.

The banking industry has always complained that credit unions’ tax exemption provides an unfair competitive advantage. This complaint lacks depth for a number of reasons.

  • First, credit unions control a very small percentage of the market share — both nationally and in Montana.
  • Second, a large number of banks have changed their charter to Sub-S corporations, financial entities that, like credit unions, pay no corporate income tax.
  • Finally, if the advantage were truly so great, it seems other financial institutions would convert to this not-for-profit, cooperative structure. While credit unions do sometimes convert to mutual banks, no conversions to credit unions are on record.

 

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