Unrelated Business Income Tax

Impact

State chartered credit unions are subject to the Unrelated Business Income Tax. In the 1970s, Congress adopted the Unrelated Business Income Tax (“UBIT”) for tax-exempt organizations. It provides that certain income that is not substantially related to the tax-exempt purpose of such organizations is subject to corporate income tax. Over the years, individual state-chartered credit unions were occasionally audited by the IRS for UBIT. 

Where We Stand

Since a credit union is a nonprofit, member owned financial institution, it is reasonable that any activity or product offered should be treated as being substantially related to the credit union's tax-exempt purpose. Any interpretation of allowable credit union powers, products and services, whether by state law, regulation or policy, or by the National Credit Union Administration or the IRS as being allowed under the law's incidental powers provision, should also be deemed substantially related to a credit union's tax-exempt purpose, unless specifically prohibited in law. Therefore, there are few activities that state chartered credit unions typically engage in that should be subject to the UBIT.