What CPAs need to know about the Corporate Transparency Act

August 3, 2023 11:26 AM

The Corporate Transparency Act is a federal law requiring many business entities to identify to the Treasury Department the individuals who own a 25% or greater interest in the entity, or who otherwise exercise substantial control over it. The CTA seeks to identify entities used for money laundering and other criminal activities by requiring them to disclose their ownership and control.

The Treasury has issued final regulations implementing the CTA effective Jan. 1, 2024. Business entities subject to the CTA will face significant new reporting and related record-keeping obligations.

There are several things advisors should consider to prepare their business owner clients to comply:

New federal information filings required in 2024

A pedestrian walks near the U.S. Treasury building in Washington, D.C.

Andrew Harrer/Bloomberg

This requirement will apply generally to every entity with $5 million or less in annual U.S. revenues or 20 or less full-time U.S. employees. While many business entities will meet this requirement, many will have affiliated entities that do not meet the requirements. An entity formed before 2024 will have until Jan. 1, 2025 to file. Entities formed after 2023 will be required to file within 30 days.

Filings report identifies individuals participating in ownership or control

The individuals covered will include most who own interests in the entity — either directly or indirectly through another entity — or who serve as senior officers of the entity. Certain aspects of the tests for who is covered are deliberately open-ended, which will cause uncertainty in some cases.

Changes in information must be promptly reported

Any changes related to the individuals for whom information is required to be reported, or in the identifying information previously reported for a person, must be reported within 30 days. This will require an entity to monitor for changes.

Entities should consider amending their organizational and employment documents now

An entity is required to report and update identification information about individuals participating in the ownership or control of the entity. The CTA does not impose an obligation on individuals to provide this information to an entity for its use in meeting its reporting obligation, so an entity should consider amending its organizational and employment documents to require affected individuals to provide this information. To reduce the entity's burden in reporting changes in the individual's information, the entity should consider requiring an affected individual to obtain an identifying number from the Treasury. This will have the effect of shifting the burden of reporting changes of information to the individual.

Individuals to be identified

While the CTA refers to individuals who own a 25% or greater interest or who exercise substantial control over an entity as "beneficial owners," this is not limited to individuals who actually own interests in the entity. The CTA refers to "directly or indirectly, through any contract, arrangement, understanding, relationship or otherwise." For example, this will include an individual owning an interest in another entity that owns an interest in the reporting entity. The regulations broadly define "substantial control" to include service as a "senior officer," the ability to appoint or remove a senior officer or a majority of a board of directors or similar body, or "substantial influence" over "important decisions" made by the entity, including but not limited to the matters listed in the regulations.

Information required

An entity is required to identify individuals by their full legal name, residential street address, date of birth and the number on their passport, driver's license or other government-issued identification. A photocopy of the identifying document containing the number with a photograph of the individual must be submitted.

Reporting updates

A reporting company is required to report to the Treasury any change in the information earlier reported within 30 days of the change. For example, a change in the address of any "beneficial owner" will trigger a requirement to report the update. An individual who has obtained a FinCEN identifier is required to report any change in the information submitted to obtain the FinCEN identifier within 30 days of the change.

Identification of persons forming entities

In addition to identifying individuals who are "beneficial owners," a reporting company that is created on or after Jan. 1, 2024 is required to provide generally the same identifying information about the individuals who participate in the filing of the document creating the entity. The regulations do not require a reporting company to report subsequent changes in the personal information of these individuals.

Exemptions

Many types of business entities are exempt from the CTA, including public companies, entities for which there is already substantial regulatory reporting and certain tax-exempt entities. Of broadest potential impact is an exemption for an entity that has more than 20 full-time employees, more than $5 million in annual revenues and a business office in the U.S. However, even if an entity operating a business meets these size requirements, that entity frequently will have one or more affiliated entities that do not meet all the requirements, such as a "sister" entity that owns real estate leased to the entity operating the business.