Key Takeaways:
The Anti-Money Laundering Act of 2020, enacted on January 1, 2021, contained the first-ever federal requirement for certain legal entities to identify and report their beneficial owners, also known as the Corporate Transparency Act.
The Corporate Transparency Act (CTA) was designed to “prevent wrongdoers from exploiting United States corporations and limited liability companies for criminal gain, to assist law enforcement in detecting, preventing, and punishing terrorism, money laundering, and other misconduct.” As your trusted advisor, LBMC is here to inform clients of the new reporting requirements.
Beneficial ownership reporting is not a new concept. The Financial Action Task Force (FATF) is a global administration committed to acting against money laundering, terrorists, and proliferation financing.
FATF monitors how these occurrences take place, sets global recommendations to prevent them, monitors progress, and identifies high-risk jurisdictions. In 2003, FATF released Recommendation 24 stating, “Countries should ensure that there is adequate, accurate and timely information on the beneficial ownership and control of legal persons that can be obtained or accessed in a timely fashion by competent authorities.”
More recently, FATF’s March 2023 publication reviews 16 countries’ implementation of beneficial ownership reporting whereas the United States was noted to have “lagged behind.” Specifically, the publication mentioned Delaware’s leniency as a deficiency in the U.S. legal structure.
Business entities have generally been created at the state level with very little if any ownership information disclosed. Due to the lack of stringent requirements, forming businesses to conduct illegal activity has been a major concern for the United States.
Recently, there have been many opportunities for these bad actors to scam money using a business entity by applying for employee retention credits or PPP Loans that came out of the pandemic. For example, the Department of Justice released a statement of guilt in June 2021 from a Florida man who conspired with others to steal $24M in COVID relief funds using a shell company he had previously used for bank fraud. The U.S. remained a haven for these illicit transactions due to the lack of reporting.
To get a handle on the issue, the Financial Crimes Enforcement Network (FinCEN) has been tasked with collecting information on all reporting entities, both new and existing. This is no small task considering nearly 2 million corporations and LLCs are being formed under state law annually.
The Corporate Transparency Act has been designed to bring the United States into compliance with these worldwide expectations by creating a national standard of reporting rather than a state-by-state variation. How can such a task be accomplished?
The definition of a reporting company has been broken into two categories: domestic and foreign. Domestic reporting companies are entities created by filing with a secretary of state or similar office, such as corporations or LLCs.
Foreign reporting companies are entities formed under foreign law that have registered to do business in the United States by filing with a secretary of state or similar office. Below are 23 exemptions for reporting entities:
It is important to carefully review these exemptions before determining if an entity is exempt from reporting, as some of these are vague. For example, an inactive entity must have been in existence on or before January 2020. A large operating business has several criteria to meet, including employing more than 20 full-time employees and reporting greater than $5 million in gross receipts. FinCEN has compiled a checklist entitled the Small Entity Compliance Guide to simplify these rules to the best of its ability.
Those who qualify as a reporting company must file a beneficial ownership information report beginning this year. Beneficial owners are defined as an individual who either exercises substantial control or own/control at least 25% of the reporting companies’ ownership interest.
This may seem straightforward; however, both direct and indirect ownership in the company applies. When you consider tiered ownership and trusts, it can be very technical.
Substantial control can be attained by an individual being a senior officer, having the authority to appoint or remove officers or directors, having substantial influence over important decisions, or a final catch-all statement describing “control exercised in new or unique ways.” The catch-all statement is a way to avoid noncompliance by creating a flexible corporate structure.
Company Applicant information must be disclosed for reporting entities created on or after January 1, 2024. An individual could qualify as a company applicant if they directly file the creation documents with the state. If there is more than one individual involved in filing registration documents with the state, then the second applicant is the individual primarily responsible for directing the filing of initial registering documents. The CTA states no more than two individuals would qualify as a company applicant.
The initial reporting began this year. If a reporting entity has been created on or after January 1, 2024, then the company has 90 days to file an initial beneficial ownership information (BOI) report. The 90-day period is a safe harbor for the transition. On January 1, 2025, companies will only have 30 days to file BOI reports. Existing entities, created before January 1, 2024, must file their reports by January 1, 2025.
Additional reporting is required for changes in beneficial owner information within 30 days of the change starting in 2025 (90 days in 2024). Several types of changes qualify for this reporting.
For example, if a CEO with substantial control is a beneficial owner and moves residences, they must update their IDs and the company must submit updated reports within the required 90 days in 2024 or 30 days starting in 2025.
Another common example of updated information occurs when an individual renews their driver’s license. If the report is filed with inaccurate information reporting, then a corrected report must be filed within 30 days after the reporting company becomes aware of the discrepancy.
Beneficial owners must understand these reporting requirements to avoid serious consequences. Willfully violating BOI reporting requirements may result in civil penalties of up to $500 each day as well as criminal penalties of up to $10,000 and two years in prison.
Some of these violations include intentionally failing to file a BOI report, providing false information, or willfully failing to correct or update BOI reports. The responsibility for ensuring accurate information is reported rests on the reporting company.
Information reported on beneficial owners includes full legal name, date of birth, current address, identification number from ID or FinCEN identifier, and an image of a government-issued photo ID.
On December 22, 2023, a final ruling for accessing the beneficial reporting database was released. Safeguards must be employed to protect the private information of many companies and individuals. Six categories of recipients may receive BOI from FinCEN under certain circumstances. These recipients include:
Various security requirements have been set up for each type of authorized recipient to protect BOI while creating a highly useful database for uncovering illegal activity once hidden by corporate anonymity.
CPAs have a limited grant to interpret tax law under Circular 230. However, many CPAs await guidance on whether the CTA statutes listed under Title 31 of the U.S. Code is acceptable for a CPA to offer services. What constitutes the practice of law Is defined on a state-by-state basis.
For the time being, many insurance companies are advising CPAs not to practice these services. For this reason, LBMC is not filing any beneficial owner reports.
Staying compliant with the new beneficial ownership reporting requirements is crucial. While LBMC does not file these reports, we aim to keep clients informed. FinCEN has provided an online system with instructions, FAQs, and brochures to help with any questions.
Entities existing before 2024 must file a BOI report by the end of 2024. If you file mid-year and information changes, an update will be required. New companies have 90 days to file in 2024; this period reduces to 30 days in 2025.
LBMC Tax Advisors can partner with your legal counsel to ensure you are fully compliant with the new reporting requirements. For specific form-related questions, contact your legal counsel. For general inquiries, reach out to the LBMC Tax Team.
Content provided by Shelby Follis and Melissa Sun.
Shelby Follis is a CPA and manager in LBMC’s Nashville tax department, focusing on high-net-worth individuals and investment partnerships. She keeps herself and others informed through research, CPE, and writing for the Tennessee CPA Journal.
Melissa Sun is a CPA and Senior Manager in LBMC’s Nashville Tax Division, specializing in tax consulting, planning, and compliance for high-net-worth individuals and their families, with a primary focus on individual taxation and trusts.
LBMC tax tips are provided as an informational and educational service for clients and friends of the firm. The communication is high-level and should not be considered as legal or tax advice to take any specific action. Individuals should consult with their personal tax or legal advisors before making any tax or legal-related decisions. In addition, the information and data presented are based on sources believed to be reliable, but we do not guarantee their accuracy or completeness. The information is current as of the date indicated and is subject to change without notice.
