Bankers’ New Strategy: Be like Credit Unions

In the last seven years there has been a 353% increase in S Corp bank charters. Find out why banks are increasingly drawn to Subchapter S status and see if you can spot any similarities to the CU approach.

 
 

Are community banks trying to emulate the credit union model? It appears so.

Following the IRS changes to the Subchapter S code in December 1996, banks suddenly became eligible for the new classification. As of March 2004 over 2100 banks are mirroring the credit unions’ tax structure- more than 3.5 times the number operating under this corporate structure in 1997. Approximately one out of every four banks and thrifts with less than $1 billion in assets has chosen to switch to Subchapter S status.

Instead of paying taxes to the federal government, Subchapter S Corporations distribute the net income to shareholders who in turn report and pay taxes on their individual returns. In other words, the flow of payments is identical to that of credit unions. If a Subchapter S Corporation elects to keep its net income as capital, the shareholders’ stock increases by the amount of income recognized by the company. When shareholders do choose to sell their stock, they will recognize a smaller gain than a “C” corporation, thus paying fewer taxes on the sale overall. However, Subchapter S Corporations will still pay taxes on retained earnings while credit unions do not.

The IRS also relaxed in December 1996 certain restrictions that prohibited banks from seeking Subchapter S status. First, it increased the maximum number of shareholders from 35 to 75. Second, the corporation could now own up to 100 percent of another corporation or subsidiary whereas the limit was 80 percent prior to the ruling.

Look for more banks to pursue Subchapter S status in the next few years to reduce their tax liabilities. The million-dollar question is how this “advantage” will impact banks’ profitability and market share.

 

 

 

July 5, 2004


Comments

 
 
 
  • INTERESTING GREAT INFORMATION TO USE AGAINST TAXATION
    Anonymous
     
     
     
  • Like the general theme of the story, the following statement made in paragraph three is incorrect and misleading: "In other words, the flow of payments is identical to that of credit unions." A sub S corporation puts the owners name on the flow of payments and net worth, and the net worth becomes part of the owners' personal net worth, much like income from a partnership or limited liability corporation. The sub S ownership interest can later be sold, borrowed against, or transferred to children. Such is not the case with the "ownership" interest in a credit union, it is not perfected and hence fictional. Income taxes are in fact assessed to shareholders of sub S corporations and payable to those who are subject to taxation. Sub S is a tool to reduce or manage income tax liability not forever avoid it. Frankly, it seems many credit union writers are confused about sub S status or seek to mislead readers in an effort to make commonplace profit making business activities seem wrong. Sub S corporations are not trying to emulate the credit union model. Why would a shareholder abandon their equity? Perhaps credit unions, though, should emulate the Sub S model. This is America.
    Anonymous