The Corporate Transparency Act of 2019 (“CTA”) officially goes into effect on January 1, 2024. This law affects more than just large, publicly-traded corporations. All existing and newly applied-for business entities that were either created in the U.S. or registered to do business in the U.S., will be required to file a Beneficial Ownership Information (BOI) report with the U.S. Financial Crimes Enforcement Network (FinCEN) about the reporting company and their beneficial owners, including identifying numbers such as social security numbers and EINs of beneficial owners.

The intention behind the Corporate Transparency Act is to minimize the money laundering and fraud avenues criminals use to fly under the radar. Small businesses will now have an additional burden of disclosing beneficial ownership that will be available in a database that can be accessed by law enforcement, financial institutions, national security agencies, and “other” agencies (including the Department of Treasury).

Who is required to file a report with FinCEN?

The CTA defines a reporting company as a corporation, limited liability company (LLC), or similar entity that was set up through the secretary of state or a similar office. A foreign company that has registered with the secretary of state (or similar office) to do business in the United States also falls under the category of a reporting company.

What is included in a similar entity?

Limited liability partnerships (LLP), limited liability limited partnerships (LLLP), business trusts, and limited partnerships (LP) are all required to file a report. If a filing was prepared to register the business in some capacity, then the entity will be subject to the beneficial ownership reporting requirement.

Are there exceptions?

The law does define 23 exceptions to filing a BOI report, although most small businesses will not fall into one of these categories. A primary example is the large operating company exception which is a company with more than $5 million in gross receipts reported on a U.S. tax return annually, over 21 employees based in the U.S., and a physical office in the U.S. will be allowed an exemption. Most of the 23 exceptions relate to companies that are required to file with a governing board or provide a report for the public to view – publicly traded companies already reporting to the SEC, tax-exempt 501(c) entities, government authorities, and public utilities, banks, and registered investment companies to name a few.

What is a beneficial owner?

If you don’t fall into one of the exceptions to the filing, what information are you required to provide to FinCEN? A beneficial owner is an individual who – whether directly or indirectly:

1. Exercises substantial control over a reporting company
2. Owns 25% or more of the interest in a reporting company
3. Receives substantial economic benefits from the assets of a reporting company.

Substantial control can be defined as having the ability to direct or influence decisions of the company, appoint/remove board members or senior officers, C-suite officers, or “any other form of substantial control.”

Ownership interest encompasses voting and non-voting shares, profits interest, convertible interests, and options to buy or sell (puts, calls, staddles, etc). Ownership can be direct, joint ownership, as a trustee with power to dispose of trust assets, certain beneficiaries, grantors, or settlors that have the right to revoke or withdraw assets.

Why is this important for you?

There are steep penalties for noncompliance with BOI reporting. CTA authorizes the government to issue civil and criminal penalties which can include a fine, a prison term for up to three years, or both, for providing false or fraudulent beneficial ownership information or for willfully failing to provide complete or updated beneficial ownership information. Failures to report or inadvertent mistakes while acting in good faith penalty is $500/day the violation is not corrected, up to a maximum of $10,000 and/or two years in prison. If the violation or noncompliance is willful or fraudulent, the maximum penalty increases to $250,000 and/or five years in prison (up to $500,000 and/or 10 years in prison for illegal activity involving more than $100,000 in a 12-month period). These penalties are not limited to the reporting company and company applicants. Beneficial owners may be held individually liable for willful violations.

From a tax compliance perspective, the new BOI database will house a massive amount of information on reporting companies that will be readily available to the IRS. The Service will have the ability to match EINs and SSNs of beneficial owners to income tax filings, creating a potential uptick in IRS examinations for businesses and individuals.

The BOI database will also help the IRS to identify companies and individuals that have foreign reporting requirements, specifically foreign entities that are registered to do business in the U.S.,  U.S. companies that have indirect foreign ownership, or foreign investments owned by U.S. companies. These penalties are not limited to late filing or non-reporting. Civil and/or criminal penalties can be assessed above and beyond the standard penalties. And if that isn’t enough, individuals could face prison time if they determine that the non-compliance was considered a deliberate avoidance of tax (willful violation).

What should I do now?

Consult with your RS&F tax advisor about the potential impact that the Beneficial Ownership Information reporting will have on your tax compliance requirements. An in-depth discussion of all your entities’ structures, geographic locations of business, bank accounts and investments, and ownership (direct and indirect) is imperative for staying in compliance with the IRS and avoiding potential civil and criminal penalties.

By Abigail R. Fletcher, CPA, MBA​, Senior Manager
RS&F