The Three Corporate Transparency Act Exemptions You Must Know

The Corporate Transparency Act (CTA) is a new law that requires many “reporting companies” to report information about the company and its owners to the Financial Crimes Enforcement Network (or FinCEN) of the U.S. Department of the Treasury.

Under the new CTA rules, a “reporting company” is defined as an entity that is created by filing a document with the secretary of state. Broadly speaking, this encompasses most LLCs, Corporations, and LPs.

However, the regulations do provide exemptions for 23 types of reporting companies. I won’t walk you though all of them in this article. But there are three exemptions that every business owner and real estate investor must know about.

     1.) Tax-Exempt Entity Exemption

The first exemption is the tax-exempt entity exemption, and it includes three types of entities. The first is that the entity is an organization described in section 501(c) and exempt from tax under section 501(a). The second is an entity that is a political organization defined in section 527(e)(1). And lastly, the entity is a trust described in section 4947(a).

Most notably missing under this exemption is Homeowners Associations (or HOA’s) who file tax returns under Section 528 of the tax code. While there has been talk about exempting these HOA’s, it most likely won’t happen. Because of this, most HOA’s will need to comply with the CTA by reporting their BOI to FinCEN.

     2.) Inactive Entity Exemption

The second exemption is the inactive entity exemption. In order to be exempt as an inactive entity, a business must meet the following six requirements:

• Be in existence before January 1^st, 2020
• Not be engaged in active business
• Have no ownership held by a foreign person
• Have had no change in ownership in the last 12-month period
• Have not sent or received funds over $1,000 within 12-month period; and
• Does not hold any type of assets

For real estate investors, this exemption may apply to syndications that have wound up, or to investors who formed an entity to buy a rental property but didn’t. And if you meet all of the six requirements listed above, your reporting company will not need to report your BOI to FinCEN. But if you aren’t sure you meet all of the criteria, you are better off filing.

     3.) “Large Operating Companies” Exemption

The third exemption is the “large operating companies” exemption. And an entity falls into this category if:

• It employes 21 or more employees in the US
• It has more than $5 million in gross receipts or sales in the US, and
• It has a physical office in the US

If a company meets all three requirements, they do not need to report their BOI to FinCEN. But if someone starts out thinking that they will have at least $5 million or more in gross sales, they will still need to file since they have no proof of their lofty goals.

Other Exemptions

Most of the other exempt entities fall into the already regulated categories of insurance, banking, utilities, and securities. And if your entity falls into those categories, then you won’t need to perform a FinCEN filing.

Conclusion

The CTA is a new law with many intricacies. And one important consideration is to determine whether your company is actually a “reporting company” under its regulations.

Luckily, we here at Corporate Direct would be happy to help you navigate this new law. For more information on the CTA, you can schedule a free 15-minute consultation with one of our incorporating specialists by clicking the link here: https://corporatedirect.com/schedule/