Do tax benefits conferred to Sub-S banks affect their deposit or loan rates? Craig A. Depken II a , Harris Hollans b , Steve Swidler b,⇑ a Department of Economics, The Belk College of Business, University of North Carolina-Charlotte, Charlotte, NC 28223, United States b College of Business, Lowder Bldg., Auburn University, Auburn, AL 36849, United States article info Article history: Received 22 January 2010 Accepted 7 September 2010 Available online 15 September 2010 JEL Classification: E43 G21 G28 H25 Keywords: Sub-chapter S bank Community bank Deposit rate Loan rate abstract Positive economics predicts that Sub-S banks, with no taxes paid at the corporate level, will price their products lower than otherwise identical C corporation banks in a competitive environment. Alter- natively, if banks price bundle their products, Sub-S tax benefits might have little (no) effect on product rates. The empirical analy- sis finds that Sub-S deposit (loan) rates are equal to or lower (higher) than similar C corporation bank rates. Thus, there is little evidence of any tax benefits accruing to Sub-S bank customers. In contrast, tax-exempt credit unions do offer higher deposit rates and lower loan rates than C corporation banks. Ó 2010 Elsevier Inc. All rights reserved. 1. Introduction Passage of the Small Business Job Protection Act of 1996 enabled traditional C corporation banks to reorganize as Sub-chapter S corporations (hereafter, Sub-S banks). The advantage of Sub-S incorpora- tion is that it allows banks to effectively avoid federal income taxation at the corporate level. Instead, shareholders pay personal federal income taxes on pass-through earnings, whether in the form of div- idends or retained earnings. While the early legislation set a maximum of 75 shareholders to incorporate as a Sub-S firm, the American Jobs Creation Act of 2004 changed the threshold to a less restrictive ceiling of 100. Moreover, multi-generational families now counted as one shareholder, thereby making it easier for family-owned 1544-6123/$ - see front matter Ó 2010 Elsevier Inc. All rights reserved. doi:10.1016/j.frl.2010.09.002 ⇑ Corresponding author. Address: 303 Lowder, Auburn University, Auburn, AL 36849, United States. E-mail address: swidler@auburn.edu (S. Swidler). Finance Research Letters 7 (2010) 238–245 Contents lists available at ScienceDirect Finance Research Letters journal homepage: www.elsevier.com/locate/frl