Why banks’ retained profits are taxed but credit union retained earnings are not

It’s a major point of contention between credit unions and banks that banks pay corporate income taxes on their retained profits, but credit unions do not pay corporate income taxes. Why the different treatment?

An understanding of the basic difference between a credit union and a bank is essential.

When a credit union has a profit, no person or group of persons can access those funds. No one can personally benefit from the earnings. When those earnings are made available to the member—returned as a dividend, for example—a tax will be levied.

On the other hand, consider what would happen if, when a bank had a profit at the end of the year, no corporate tax was levied against these earnings. Could anyone benefit from the increased value of the bank’s retained earnings? Absolutely! Every stockholder can benefit by selling their stock for more than they could have before the earnings were retained.

So, there’s one reason: an individual stockholder can benefit from the retained earnings.

In fact, a stockholder could even take advantage of the increased value of the stock without paying taxes on the increase. How? By donating the stock to a favorite charity or religious organization. The stockholder would pay no taxes on the donation, then in turn receive a receipt from the charity or church for the full value of the stock—which would be used as a deduction on the next income tax return.

So, not only can stockholders benefit from the increased value of the stock, but they can also do so in a tax-free way. In fact, they can do so in a tax-advantaged way. They can decrease their tax burden because of the bank’s increased retained earnings. The possibility exists that no taxes would ever be paid on all or some of that income.

The bottom line is that credit unions and banks are different. Purpose-wise, they are different. Structurally, they are different. The fact that they both offer the same services does not make them the same.

Even though they both retain earnings, how those earnings benefit owners, and when owners can benefit from those earnings, is different. Therefore, taxation is different.