On January 1, 2021, the National Defense Authorization Act for Fiscal Year 2021 (NDAA) was passed, and included with it was the Corporate Transparency Act (CTA). The CTA requires certain business entities to file information on their “beneficial owners” with the Financial Crimes Enforcement Network (FinCEN). FinCEN is the same organization to which taxpayers disclose foreign assets, with reports such as an FBAR or Form 8938. With this information the FinCEN intends to create a database of owner information to crack down on finding and preventing anonymous shell companies used for money laundering, terrorism, tax evasion and other illegal activity.
These new reporting requirements are applicable to “reporting companies”, any corporation, limited liability company or other similar entity that is organized in any state, or formed under the law of a foreign country but is registered to do business in the United States. There are 23 specific exemptions from filing, but generally, the exempt entities fall into two categories. First, are entities that are already required to disclose beneficial ownership information publicly or to federal regulators, such as public companies, financial institutions, governmental entities and tax-exempt organizations. The second category consist of entities that do not exhibit shell company characteristics and are not perceived to have a high risk of illegal activities. This includes companies with over 20 full-time employees in the U.S., companies filing income tax returns showing more than $5 million in gross receipts or aggregate sales, and companies with an operating presence in a physical location in the U.S.
Information must be reported on both beneficial owners and applicants of a reporting company. A beneficial owner is an individual who, either directly or indirectly, controls or exercises power over 25% or more of the ownership interest in the reporting company. Applicants are any individual filing an application to form or register the reporting company. Information reported will include the individual’s full legal name, date of birth, current residential or business address, and a unique identifying number from an acceptable identification document (such as a driver’s license or passport).
The Secretary of the Treasury has until January 1, 2022 to prescribe regulations into effect. Any reporting companies formed on or after the effective date of the regulations must submit a report containing the beneficial ownership information at the time of its formation or registration. Companies that had been formed prior to the effective date must submit the report no later than two years after the effective date of the regulations. Any changes to reported beneficial ownership information must be reported no later than one year after the change was made. Both civil and criminal penalties are authorized in the CTA for willfully failing to report or providing false information.
This information is general in nature and should not be relied upon. If you have specific questions, please reach out to a specialist in this area. Please consult your Henry+Horne tax advisor for your specific situation.
Haley M. Braun, CPA