Credit unions are member owned financial cooperatives, and their member-owners pay taxes on dividends they receive from their deposits. Much like a bank that elects S-corp status, the profits are not taxed at a corporate level since they will already be taxed at the ownership level. Then for what reason would a credit union pursue tax credits?
Tax credits have two sides- a buy side and a sell side. While the credit union does not need to purchase tax credits, there may be a tremendous opportunity in selling or allocating tax credits.
To make use of these tax credits, a credit union must apply to become a certified development entity (CDE). Once they are a CDE, they can apply for tax credits awarded through the CDFI Fund, managed under the US Treasury. These specific tax credits are known as New Markets Tax Credits, and the CDE (the credit union) effectively allocates the tax credits to business projects. Those tax credits are then sold to raise capital for qualified businesses in low income communities.
Credit unions can help support qualified businesses in low income communities through the use of tax credits. No, the credit union will not receive tax benefits, but they can help make businesses a more attractive lending opportunity. When a business lacks equity, the credit union will be hesitant to extend a business loan to a member. The tax credits can be used to raise capital on the businesses’ behalf, making the business a safer lending opportunity for the credit union.
Aside from New Markets Tax Credits, there are also Historic Tax Credits for rehabilitating historic properties and Low Income Tax Credits to support affordable housing. All tax credits can effectively provide the same benefit to the borrowers. The sale of the tax credits raises additional equity for a project, which generally improves the credit worthiness of the member.
If a member proposes using tax credits to help fund a project, listen closely. They are likely not suggesting that your credit union will receive some sort of tax benefit, but rather they are using an innovative way to raise equity for their project.