Are You Ready for the Corporate Transparency Act Starting January 1, 2024?
Episode 245 – The effective date of the Corporate Transparency Act, January 1, 2024, is nearly upon us. Are you affected and, if so, prepared to comply with its mandates and regulations?
Transcript of Podcast Episode 245
Hello this is Bill Rainaldi, with another edition of Security Mutual’s SML Planning Minute. In today’s episode: Are You Ready for the Corporate Transparency Act Starting January 1, 2024?
On January 1, 2021, the National Defense Authorization Act of 2021 (“NDAA”) was passed by Congress over the veto of President Trump. Included in the NDAA was the Corporate Transparency Act (“CTA”), designed to develop a more robust regulatory framework to combat money laundering and tax evasion activities using potentially anonymous entities. The main requirements of the CTA are the full disclosure of the identities of the individual owners of an entity, or those who control the entity as beneficial owners. Reporting occurs when the entity is created or when there is a change of ownership or control. The CTA will also create a national registry of entities and their owners.
On September 29, 2022, the Financial Crimes Enforcement Network (“FinCEN”), which will maintain the registry and to whom the reporting will be made to, issued final regulations. These final regulations have an effective date of January 1, 2024. For entities that have existed prior to that date, the deadline to file the required information to FinCEN is January 1, 2025. For entities created after the effective date, the required reporting must be done within 30 days of creation of that entity.
The CTA is very complex and has a broad reach. The final regulations provide details on the entities that must report and what those reporting requirements are. Entities that must report include domestic and foreign corporations, limited liability companies, limited partnerships and other business entities registered to do business in one of the states or in the U.S. This would include most small businesses other than sole proprietorships. Owners and beneficial owners would include any individual that, directly or indirectly, exercises substantial control over a reporting company, and is an owner or controls at least 25% of the ownership interests of the company. Beneficial ownership interests include not only equity in a company, but also capital or profits interests, convertible rights, warrants or options to acquire equity or capital.
Information that must be reported to FinCEN includes the full legal name and any “doing business as” names of the entity, the principal place of business, tax identification numbers and the individual beneficial owners of that entity. Information on the beneficial owners include similar information as required from the reporting entity as well as information from a non-expired government issued document, such as a U.S. passport or driver’s license. Any changes to this information must also be reported within 30 days of the change.
Many legal commentators believe the CTA overreaches and may be unconstitutional. Nevertheless, it is currently the law, and many businesses are not prepared for it. For high-net-worth families doing complex estate planning, the CTA may also impact their planning. Trusts are commonly created for estate planning purposes.
Trusts often own assets, such as corporations and limited liability companies, which would require reporting for the purposes of CTA. Trust beneficiaries may be deemed beneficial owners of these entities and, therefore, would be required to fulfill reporting requirements. The final regulations include examples of when a trust beneficiary would be deemed a beneficial owner of interests in a reporting company, including trust beneficiaries who have the right to demand distributions or withdraw assets, or are the sole permissible recipient of income and principal from a trust. Families that create LLCs to hold family real estate or other investments may also be subject to the CTA reporting requirements.
Failure to comply with the CTA may result in severe civil and criminal penalties, including fines of $500 per day up to $10,000 and up to two years of imprisonment.
The CTA casts a wide net and is purposefully broad. Not only are the regulatory provisions new, but they can also be very confusing and uncertain in their application. Attorneys and accountants may not be fully versed in the CTA’s application. Therefore, you should consult with your tax or legal advisor as soon as possible to determine how the law and its regulations impact your own situation.
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