Starting in 2024, the Corporate Transparency Act (CTA) will require businesses to file “Beneficial Owner Information” reports (BOI), which will provide the U.S. Treasury Department with a database of beneficial owners of businesses. Failure to comply with the filing requirements may lead to huge penalties for businesses, including fines up to $10,000 and imprisonment up to 2 years.
When small business owners make big business decisions, it’s rare to find that a formal record was made of the meeting when it took place. While this type of reporting requirement for registered businesses may be easy to overlook, 2024 will bring a new filing requirement from the Corporate Transparency Act (CTA) that cannot be ignored. Huge penalties could be in store for 32 million businesses with fines of $500 per day—capped at $10,000—and up to 2 years imprisonment. It’s highly important for small and large business owners alike to know if the requirements apply to them.
What is the Corporate Transparency Act?
The Corporate Transparency Act is part of the Anti-Money Laundering Act of 2020, a law that Congress passed in January 2021. Its intent is to help secure the United States financial system by flushing out shell corporations, money launderers, and others who funnel illicit funds into our economy. It aligns with many of the recommendations of the global Financial Action Task Force (FATF) that work to combat money laundering and terrorist financing.
The CTA mandated that the U.S. Treasury Department create a database of beneficial owners of businesses. The program is being run by their Financial Crimes Enforcement Network (FinCEN) with the IT system scheduled to launch on January 1, 2024.
Which businesses are required to file due to the CTA?
Businesses that are required to file are called “reporting companies”. The reports that they will file are “Beneficial Owner Information” reports (BOI). The reporting companies fall into two categories—domestic and foreign.
• A domestic reporting company is a corporation, limited liability company, or any other entity created by the filing of a document with a secretary of state or a similar office under the law of a state or Tribe.
• A foreign reporting company is a corporation, limited liability company, or any other entity formed under the law of a foreign country AND is registered to do business in any U.S. state or in any Tribal jurisdiction by the filing of a document with a secretary of state or a similar office under the law of a state or Tribe.
Are there exemptions to CTA Filing Requirements?
YES! There are 23 categories of exemptions, but the 32.6 million businesses that FinCEN estimates need to file already exclude them. At a high level, if your business does under $5 million in annual revenue, you can expect to be required to file a BOI report in 2024.
Some of the more prominent groups of exemptions:
- Regulated companies are exempt since they already provide ownership information to regulatory bodies. These include groups such as banks, SEC reporting companies, investment firms, and insurance companies.
- Large operating companies are exempt if they maintain a physical office or workspace in the U.S., employ 20 or more individuals, AND earn more than $5 million in U.S. sales as noted on their federal income tax return.
- Inactive companies
- Tax exempt entities
Who are the “beneficial owners”?
Beneficial owners are individuals who directly or indirectly have substantial control of the organization.
- Substantial control is defined by FinCEN as those having 25% or more ownership or control of the company.
- It also includes those who have substantial control without an ownership stake:
- Serving as a senior officer of the company
- Has authority over the appointment or removal of any senior officer or a majority of the board OR
- Directs, determines, or has substantial influence over important decisions made by the reporting company.
- Minors, those with a future interest in the company through inheritance, and creditors of the company are excluded.
What information needs to be reported?
The BOI report will first ask for company information, including its legal name, any DBAs, its tax identification type and number (EIN, SSN, ITIN, or foreign), state or Tribal jurisdiction where the formation occurred or the company was registered in the U.S., and its current U.S. address.
Each beneficiary owner will provide their address, date of birth, a government issued identification number (license or passport)—as well as an image of the document—for the Beneficial Owner Information report.
For companies that are formed on or after January 1, 2024, you’ll also include “company applicant” information. A company applicant is the individual who directly files documents that creates or registers the reporting company. It can also be an individual who is primarily responsible for directing or controlling the filing of the relevant document.
Filing with FinCEN Timeline
While it’d be nice to do the filing now to get it out of the way, unfortunately FinCEN’s new database—the Beneficial Ownership Secure system—isn’t available and reports won’t be accepted until 1/1/24. The proposed report form fields and processing information were open to public comment and the final versions may be different from what’s currently being discussed.
Initial filings for companies that are formed on or after January 1, 2024, must be done within 30 days of the company’s registration.
Existing companies that are formed before January 1, 2024, have one year to complete the BOI report and register it with FinCEN. They must be completed by January 1, 2025.
Updates and/or corrections of information previously filed must be submitted within 30 days of when the information changed.
Transparency at a Cost
It is a massive undertaking to reach 32 million companies. So, while FinCEN intends to educate business owners and raise awareness of the CTA filing requirements, they have had little success in hitting the mainstream press thus far.
Enacting the requirements within the Corporate Transparency Act has also been riddled with controversy. Some believe the intent of Congress isn’t being followed, have deep concerns about who will have access to the information, and/or have concerns on whether the safeguards planned for the data are sufficient.
This first wave of companies exempts larger private companies from filing. However, once the dust settles, that group may be the next targeted for inclusion in the new FinCEN database.
REDW’s trusted tax professionals are here to help you understand how to determine your filing requirements and provide information to be reported. Contact James Ortiz or Brandon Remley for additional information. We welcome your questions.
