If you run a business in the United States, you’re likely aware of corporate fraud. A 2022 report revealed that businesses lose an average of 5% of their gross revenues to fraud. Think about the impact if your business earns millions. Surprisingly, many companies fall victim to partnering with seemingly legitimate, but fraudulent, entities.
This is where the Corporate Transparency Act (CTA) comes in. Enacted by Congress on January 1, 2021, with its rules taking effect on January 1, 2024, the Act promotes transparency in business ownership to safeguard businesses from risky associations.
Overview of the Corporate Transparency Act
The CTA requires companies to disclose information about their beneficial owners – the individuals who own or control the company. This makes it harder for bad actors to hide behind anonymous companies and essentially prevents illicit financial activities like money laundering, tax evasion, and fraud.
Reporting Requirements for Covered Entities
To comply with the Act, businesses must meet specific reporting requirements. While these requirements took effect on January 1, 2024, businesses formed before this date have until January 1, 2025, to comply.
Covered entities under the CTA include corporations, limited liability companies (LLCs), and other businesses created by filing a document with a secretary of state or similar office. Both domestic and foreign entities that register to do business in the United States must adhere to these requirements.
If your business qualifies as a covered entity, its beneficial owners must provide the following Beneficial Ownership Information (BOI):
- Full legal name
- Date of birth
- Current residential or business address
- Identifying number from an acceptable identification document (e.g., passport or driver’s license)
Additionally, businesses must report the following company information:
- Legal name of the company
- Any trade names used
- Current street address of its principal place of business
- Taxpayer identification number
These disclosures help identify the true individuals behind a company, making it harder for people to hide behind anonymous entities. This transparency is crucial for preventing illicit activities and ensuring a more accountable business environment.
Reporting Deadlines and Procedures
The CTA sets specific deadlines for both initial and ongoing reporting.
Initial reporting:
- Businesses formed or registered before January 1, 2024, must file their initial beneficial ownership information (BOI) report by January 1, 2025.
- Entities formed or registered in 2024 have 90 calendar days from the date of formation or registration to submit their initial BOI report.
- Starting January 1, 2025, entities must file their initial BOI reports within 30 calendar days of formation or registration.
Ongoing reporting:
- Companies must update BOI information within 30 calendar days of any relevant changes or corrections to beneficial owners’ details.
For data protection and security, relevant information and documents must be electronically submitted via FinCEN’s Beneficial Ownership Secure System (BOSS).
Exemptions and Special Circumstances
The Corporate Transparency Act (CTA) provides specific exemptions to reduce the compliance burden on entities already subject to similar regulations. There are 23 types of entities exempt from the beneficial ownership information reporting requirements. These include banks, credit unions, tax-exempt entities such as nonprofits, public utilities, and large operating companies.
A “large operating company” qualifies for an exemption if it meets three criteria:
- It employs more than 20 full-time employees in the United States.
- It operates and has a physical address within the United States.
- Its previously filed federal income tax return reflected in excess of $5 million in gross receipts or sales. This excludes revenue from sources outside the United States.
Penalties for Non-Compliance
While the CTA may pose challenges that relate to safeguarding sensitive information, and maintaining timely updates to avoid penalties, adhering to the reporting obligations is crucial. This is because it safeguards U.S. businesses against transparency-related risks and promotes an accountable business environment.
Failing to comply can lead to severe penalties. Covered entities that do not meet reporting requirements may face civil fines of up to $500 per day, up to a maximum of $10,000. Criminal penalties include fines up to $10,000 and imprisonment for up to two years for deliberately providing false information or failing to report updated beneficial ownership details.
More information on penalties and compliance requirements can be found on the FinCEN website.
Compliance and Legal Guidance
Navigating new regulations can be daunting. Not only do you need to ensure accuracy, but you also have to manage the ongoing updates that authorities may require as the law becomes firmly established. Working with a tax or legal practitioner in this regard is key.
At Fusion CPA, we offer tailored services to help businesses across various industries navigate the complexities of tax laws and regulations, including the CTA. Partner with us to ensure compliant corporate transparency. We can also help you with tax filing, accounting software integration services, and more. Contact us today!
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This blog article is not intended to be the rendering of legal, accounting, tax advice, or other professional services. We base articles on current or proposed tax rules at the time of writing and do not update older posts for tax rule changes. We expressly disclaim all liability regarding actions taken or not taken based on the contents of this blog as well as the use or interpretation of this information. Information provided on this website is not all-inclusive and such information should not be relied upon as being all-inclusive.