Yay! More laws, just what we all wanted. The purpose of the Corporate Transparency Act (CTA) is to reduce terrorist financing, money laundering, and other illegal activities. Like most of you I am 100% confident that it will be effective in stopping those things. The CTA was signed into law in 2020 and goes into effect in 2024. The CTA isn’t about taxes, but it is about a reporting requirement to the US Treasury Department and many tax professionals do some reporting to the US Treasury Department due to foreign income reporting requirements. Likely I and many other tax professionals will be assisting in this reporting. It is expected to be reported through a FinCEN reporting requirement, similar to how foreign accounts are reported to FinCEN. 

Why am I talking about this now? 

Because many taxpayers with rental properties and businesses have an LLC. If you are or have a reporting company then you have reporting requirements. Unless you do the reporting yourself then your costs will go up. A reporting company is any entity that is a corporation, an LLC, or any other entity created by filing a document with the state or Indian tribe. Actually that is the definition of a domestic reporting company and a foreign reporting company is similar. 

There are reporting company exceptions. Certainly if you would otherwise be or have a reporting company check those to see if you have an exception. It is rather a long list. Many are ones that have oversight or reporting requirements already. Here is one that may be common: Inactive entity. Quite frequently I run into folks who have an LLC that was set up and nothing ever happened with it. Here are the criteria for the inactive entity exception: 

  1. Was in existence on or before January 1, 2020,
  2. Is not engaged in active business,
  3. Is not owned by a foreign person, whether directly orindirectly, wholly or partially,
  4.  Has not experienced any change in ownership in the preceding twelve month period,
  5. Has not sent or received any funds in an amount greater than $1,000, either directly or through any financial account in which the entity or any affiliate of the entity had an interest, in the preceding twelve month period, and 
  6. Does not otherwise hold any kind or type of assets, whether in the United States or abroad, including any ownership interest in any corporation, limited liability company, or other similar entity.

If you have to report, when do you report?

 The initial reporting requirement starts in 2024.

 For a company formed before Jan 1 2024 the initial report must be filed within 1 year of Jan 1 2024. As long as you file the report in 2023 you are good. 

For a reporting company created on or after January 1, 2024, an initial report must be filed within 30 days of the earlier of two dates: 

1.The date the reporting company received actual notice that the creation/registration is effective, or 

2.The date a secretary of state or similar office first provides public notice that the domestic company has been created or the foreign company has been registered.

 

Updated reports are required when there is a change to previously reported information about the reporting company itself or its beneficial owners. Due within 30 calendar days after a change occurs. 

Corrected reports are required when previously reported information was inaccurate when filed. Due within 30 calendar days after the reporting company becomes aware or has reason to know of an inaccuracy.

There is NO annual filing requirement.

What has to be reported?

Transparency right? They want to know that the company exists, who owns the company, certain people with a major role in the company, and who has some control of the company. They want to be able to find these people.The required information can be divided between information on the reporting company and information on beneficial owners.  

Information required for the reporting company: 

  1. Full legal name
  2. Trade name or “doing business as” (DBA) name 
  3. Street address of the principal place of business in the U.S. or primary location in the U.S. where business is conducted  
  4. State, tribal, or foreign jurisdiction of formation
  5. State or tribal jurisdiction of registration if foreign 
  6. taxpayer identification number 

Information required regarding beneficial owners or company applicant (but not company applicants for pre-January 1, 2024 companies):

  1. Full legal name of the individual • Date of birth of the individual
  2.  Complete current address:–Individual’s street address, or–Street address of company applicant’s business
  3. An identification number and issuing jurisdiction from one of these non-expired documents, along with an image of the document:–U.S. passport,–State, local, or tribal identification document,–State driver’s license, or–Foreign passport (if no other document)

 

What is a beneficial owner?

A beneficial owner is any individual who, directly or indirectly, either: 

  1. Exercises substantial control over such reporting company, or 
  2. Owns or controls at least 25% of the ownership interests of such reporting company.

I won’t get into a detailed discussion on what is a beneficial owner. You’ll want to make sure that whomever is determining who are among the beneficial owners is diligent in making the determination. That person and you should refer to the law and to treasury regulations. Senior management may be a beneficial owner. Board members may be beneficial owners. And possibly others. There is also some specific direction on what is not a beneficial owner. You can find more information on beneficial owners here.

So what should I do now?

We expect sorting out whose information really needs to be included in the report filing will be the most difficult part of this for many entities. And this is important, both because taxpayers should comply with the law, but also because there are penalties for not complying with the law. If impacted by the CTA, I recommend you let any other owners and anyone who may be a beneficial owner know that this information will be required and it will be collected. And make sure that you are prepared for the additional costs this may bring to you.

                                      If you have an LLC that you do not use, if it is inactive, consider closing it. Even if it qualifies for the

                                                            inactive exception. Some inactive LLCs won’t qualify for the exception

 

As 2024 approaches I recommend that taxpayers impacted by this new requirement keep an eye out for updated information regarding this new requirement. I would expect updates to show up here