OBBBA New Tax Issues: Corporate Transparency Act Reporting

The Corporate Transparency Act was enacted as part of the Anti-Money Laundering Act of 2020, which was included in the National Defense Authorization Act for Fiscal Year 2021. The Act is implemented through regulations issued by the Financial Crimes Enforcement Network (FinCEN), a bureau of the U.S. Department of the Treasury. The Corporate Transparency Act creates new beneficial ownership information (BOI) reporting requirements for many U.S. entities, and these requirements went into effect on January 1, 2024.

The Act was designed to help prevent money laundering, terrorist financing, tax fraud, and other illicit activities by requiring certain entities to report information about their beneficial owners to FinCEN. This information will be maintained in a confidential database accessible to authorized government agencies and, in some cases, financial institutions. The reporting requirements represent a significant new compliance obligation for many businesses and other entities.

Who Must File Beneficial Ownership Reports?

Most corporations, limited liability companies, and other entities created or registered to do business in the United States must file a BOI report with FinCEN, unless an exemption applies. This includes entities formed under state law by filing a document with a secretary of state or similar office, as well as foreign entities registered to do business in the United States by filing a document with such an office.

There are 23 categories of exempt entities, including publicly traded companies, certain financial institutions (such as banks, credit unions, and securities brokers), insurance companies, accounting firms, tax-exempt entities, large operating companies (entities with more than 20 full-time employees, more than $5 million in gross receipts or sales, and a physical office in the United States), and certain other entities.

Most small businesses and many holding companies, real estate entities, and other commonly used entity structures will be subject to the reporting requirements. The exemptions are relatively narrow, so most entities will need to evaluate whether they qualify for an exemption or must file a BOI report.

It's important to note that the exemptions must be determined on an entity-by-entity basis. Just because an entity is part of a larger corporate group doesn't mean it's exempt—each entity must independently qualify for an exemption. This means that many subsidiaries and related entities will be subject to the reporting requirements even if a parent company qualifies for an exemption.

What Information Must Be Reported?

Reporting companies must provide information about the company itself and about each beneficial owner and company applicant. The company information required includes the full legal name, any trade names or "doing business as" names, the complete current address of the principal place of business, the state or Tribal jurisdiction of formation (or, for foreign entities, the state or Tribal jurisdiction where the entity first registered), and the Taxpayer Identification Number (TIN) or, for foreign entities without a TIN, a foreign tax identification number.

For each beneficial owner, the reporting company must provide the individual's full legal name, date of birth, complete current residential address, and a unique identifying number from an acceptable identification document (such as a U.S. passport, state driver's license, or other government-issued identification), along with an image of that document.

A company applicant is the individual who files the document that creates the entity (or, for foreign entities, the document that first registers the entity to do business in the United States), and if more than one individual is involved in the filing, the individual primarily responsible for directing or controlling the filing. However, company applicant information is only required for entities created or registered on or after January 1, 2024.

The information must be accurate and current, and reporting companies must update their BOI reports within 30 days of any change in the reported information. This includes changes in beneficial owners, changes in beneficial owner information (such as address changes), and changes in company information.

Who Is a Beneficial Owner?

A beneficial owner is any individual who, directly or indirectly, exercises substantial control over the reporting company or owns or controls at least 25% of the ownership interests of the reporting company. An individual exercises substantial control if they serve as a senior officer, has authority over the appointment or removal of senior officers or a majority of the board, directs, determines, or has substantial influence over important decisions, or has any other form of substantial control.

An ownership interest includes equity, stock, voting rights, capital or profit interests, convertible instruments, options or other non-binding privileges to buy or sell any of the foregoing, and any other instrument, contract, or other mechanism used to establish ownership. The 25% threshold can be met through direct ownership, indirect ownership (through other entities), or a combination of both.

There are limited exceptions to the beneficial owner definition, including minor children (the parent's information is reported instead), nominees, intermediaries, custodians, or agents, employees whose control or economic benefits derive solely from their employment status, inheritors whose ownership interest was acquired through the right of inheritance, and creditors (unless they meet the substantial control or 25% ownership tests).

Determining beneficial owners can be complex, particularly for entities with complex ownership structures or where ownership or control is exercised indirectly. It's important to carefully analyze ownership and control to identify all beneficial owners accurately.

Filing Deadlines

The filing deadlines depend on when the entity was created or registered. Entities created or registered before January 1, 2024, have until January 1, 2025, to file their initial BOI report. This gives existing entities a full year to come into compliance with the new requirements.

Entities created or registered on or after January 1, 2024, must file their initial BOI report within 90 days of the date they receive actual or public notice that their creation or registration is effective. However, for entities created or registered on or after January 1, 2025, the deadline is reduced to 30 days from the date of creation or registration.

After the initial report is filed, reporting companies must file updated reports within 30 days of any change in the information previously reported. This includes changes in beneficial owners (such as new beneficial owners or ceasing to be a beneficial owner), changes in beneficial owner information (such as name or address changes), and changes in company information.

If there are inaccuracies in a previously filed report, the reporting company must file a corrected report within 30 days of when it becomes aware of or has reason to know of the inaccuracy. It's important to review and verify the information in BOI reports carefully before filing, as corrections must be made promptly.

Penalties

Willful failure to file a BOI report, provide required information, or update or correct previously filed information can result in significant penalties. Civil penalties include a fine of up to $500 for each day the violation continues, up to $10,000, and imprisonment for up to two years. Both civil and criminal penalties can apply to the same violation.

The penalties can apply to the reporting company itself and to individuals who cause the failure or are senior officers of the company at the time of the failure. This means that company officers and others involved in compliance can face personal liability for failures to file or provide accurate information.

The willful standard requires that the violation be committed knowingly, but it doesn't require that the violation be committed with the intent to violate the law. Reckless disregard of the requirements can also constitute willfulness. However, violations due to reasonable cause are not penalized, though establishing reasonable cause can be difficult.

Given the significant penalties and the personal liability that can attach to company officers, it's important to take BOI reporting requirements seriously and to implement procedures to ensure timely and accurate reporting. The requirements are new, and many entities are still learning about them, but ignorance of the requirements is generally not a defense to penalties.

If you have questions about whether your entity must file a BOI report or need assistance with filing, you should consult with a professional familiar with the Corporate Transparency Act requirements. FinCEN provides resources on its website, including a Small Entity Compliance Guide that explains the requirements in more detail.