Corporate Transparency Act: What Nonprofits Need to Know
The Corporate Transparency Act (CTA) took effect on January 1, 2024, imposing a beneficial ownership information reporting requirement on all designated reporting companies. This requirement applies to corporations, limited liability companies, limited partnerships, and any entity whose existence is created by a filing with the Secretary of State as defined in 31 C.F.R. § 1010.380(C)(1). The CTA requires organizations to file a report with the Financial Crimes Enforcement Network (FinCEN) detailing information about the organization and all direct or indirect owners.
Most nonprofit organizations, however, will be exempt from the CTA because it does not require tax-exempt organizations described in the Internal Revenue Code Section 501(c) to report. But nonprofits that have lost their tax-exempt status will be required to report. The CTA provides a limited exemption in this circumstance for 180 days that begins on the date of the loss or revocation of tax-exempt status where the organization will not have to report. If the organization has not filed for reinstatement and its tax-exempt status is not reinstated by the 180th day from its status loss, the organization likely must file a report with FinCEN.
“Twenty-three exemptions were created so specific organizations would not be subject to the reporting requirements with FinCEN.”
Twenty-three exemptions were created so specific organizations would not be subject to the reporting requirements with FinCEN. Tax-exempt 501(c) organizations are one such exemption. Additional categories include entities assisting a tax-exempt entity. Such entities are:
1. operated exclusively to provide financial assistance to, or hold governance rights over, any entity as described in the tax-exempt entity exemption (which not only includes 501(c) organizations but political organizations under IRC § 527(e)(1), or a trust described in IRC § 4947(a)),
2. a United States person,
3. beneficially owned or controlled by one or more United States persons that are United States citizens or lawfully admitted for permanent residence, and
4. derive at least a majority of their funding from one or more United States persons that are United States citizens or lawfully admitted permanent residents.
Additional exemptions include subsidiaries of a tax-exempt entity. Thus, an entity whose ownership interests are controlled or wholly owned, directly or indirectly by one or more tax-exempt entities. Large operating companies are also exempt. These are companies that employ more than twenty (20) full-time employees in the United States, have an operating presence at a physical office in the United States, and filed a federal income tax or information return in the United States demonstrating more than $5,000,000 in gross receipts or sales in the previous year.
Finally, inactive entities are exempt from reporting. An inactive entity was
1. in existence on or before January 1, 2020,
2. is not actively engaged in business,
3. is not owned by a foreign person, either directly or indirectly,
4. has not experienced a change in ownership in the preceding twelve-month period,
5. has not sent or received any funds greater than $1,000 through any financial account (directly or indirectly) in the preceding twelve-month period, and
6. does not otherwise hold any type of assets in the United States or abroad. The prohibition on ownership of assets includes ownership interests in any corporation, limited liability company, or similar entity.
Enacted in 2021 to curb illicit finance, the CTA now requires many companies doing business in the United States to ultimately report information about the individuals who own and control them. Companies who are required to file a report with FinCEN must do so by the following deadlines:
1. companies in existence on or before January 1, 2024, must file their initial report by January 1, 2025;
2. newly created or registered companies in 2024 have ninety (90) calendar days to file the report after they have received actual or public notice of their company’s effective creation; or
3. any newly created organizations after January 1, 2025, will have thirty (30) calendar days after receipt of actual notice of its creation to report.
An initial report must be filed according to the delineated timeframe above as well as when any changes to the business or beneficial ownership occur. The company then has thirty (30) calendar days from the date such a change occurs to make an updated report. Information the company must report includes:
1. its legal name and all trade, or doing business as, names of the company;
2. its actual street address of its principal place of business, not a P.O. Box nor attorney’s address;
3. its state of formation;
4. identification number; and
5. an identity document issued by its jurisdiction such as articles of incorporation or articles of organization with an image of such document uploaded.
A beneficial owner is any individual who, directly or indirectly, either exercises substantial control over the company or owns or controls at least twenty-five (25) percent of the ownership interests. An individual exercises substantial control where they serve as a senior officer of the company or have the authority to remove or appoint any senior officers of the company or a majority of the board of directors. Substantial control includes the ability to direct, determine, or substantially influence important decisions made by the company such as compensation schemes, major expenditures, sale or lease of assets, or amending governance documents like bylaws or articles of incorporation. A senior officer includes individuals employed as president, chief financial officer, general counsel, chief executive officer, chief operating officer, or other officer exercising such senior level authority. Hence, most nonprofit executives likely qualify as senior officers due to their substantial control over the organization.
Beneficial ownership information to be reported includes:
1. name of beneficial owners;
2. each owner’s date of birth;
3. each owner’s address, which cannot be their attorney’s or the company’s address; and
4. identification number and issuer of a non-expired United States Driver’s License, passport, or other governmental document. An image of such document must also be uploaded into the reporting system.
Existing nonprofit entities with tax-exempt status are likely exempt from reporting. Organizations with a revoked or lapsed tax status, however, should seek legal guidance about how to comply with the CTA. Failure to adequately comply may result in both civil and criminal penalties. Organizations that fail to report to FinCEN can face penalties of $500 per day up to $10,000 and up to two years in jail.
FinCEN has issued a guide for small businesses to understand compliance and reporting. This information can be found at: https://www.fincen.gov/boi/small-entity-compliance-guide.
Nonprofit Solutions, P.C. can assist your organization in understanding the CTA and reporting with FinCEN as well as getting your tax-exempt entity reinstated.
