Credit unions, like any other financial institution or tax-exempt organization, are generally required to file annual tax returns. However, credit unions have a special tax status that exempts them from federal income taxes under certain conditions. While they don’t pay federal income taxes, they still need to provide information about their financial activities to the appropriate tax authorities. Here’s a quick look at what exactly credit unions need to consider when filing information returns.
The Two Types of Credit Unions
There are two types of credit unions to consider:
- Federal credit unions, which are administered by the National Credit Union Administration (NCUA) and described in IRC § 501(c)(1) as federal instrumentalities. Federally chartered credit unions in the United States are generally not required to file Form 990 or Form 990-T and Form 4720.
- State-chartered credit unions, which are described in IRC § 501(c)(14)(A) and are “without capital stock organized and operated for mutual purposes and without profit.”
Annual Information Returns (Form 990)
State-chartered credit unions are tax-exempt, they are still required to file an annual information return with the Internal Revenue Service (IRS) using Form 990. This form provides details about the credit union’s activities, finances, and governance. This filing requirement ensures transparency and accountability, allowing the government and the public to monitor their operations and compliance with applicable regulations.
Excess $1M Compensation (Form 4720)
A provision in the U.S. tax code that limits the tax deductibility of excessive executive compensation paid by certain tax-exempt organizations, including credit unions, to their top executives. The rule also applies to the five highest-paid employees in a credit union. If a highly compensated employee’s compensation exceeds $1 million for the taxable year, the credit union is subject to an excise tax of 21% on the excess amount.
Unrelated Business Income Tax (UBIT) (Form 990-T)
For credit unions, Unrelated Business Income Tax (UBIT) could potentially apply to activities that generate income unrelated to their primary tax-exempt purpose. Credit Unions are required to report their UBIT using Form 990-T. Here are some examples of UBIT activities that could apply to credit unions:
- Income from the marketing of the following insurance products as well as certain ATM fees:
- Automobile warranties
- Dental insurance
- Cancer insurance
- Accidental death and dismemberment insurance
- Life insurance
- Health insurance
- ATM “per-transaction” fees from nonmembers
- Income from the following products is not subject to UBIT if sold to members. However, it is if sold to non-members.
- Credit life and credit disability insurance
- GAP auto insurance
- Income from Alternative Investments: If a credit union is a partner in a business partnership engaged in activities unrelated to its mission, its share of the partnership’s income might be subject to UBIT.
- Income from certain investments, such as leveraged or debt-financed investments, could trigger UBIT if they are not closely connected to the credit union’s tax-exempt purpose.
State & Local Taxes
Credit unions should also be aware of any state and local tax requirements that may apply to them. State regulations can vary, and credit unions should determine whether they are subject to any specific taxes at the state or local level.
If you have any questions about filing your information returns, please reach out to our team today.
