Navigating the Corporate Transparency Act (CTA) and FinCEN's Beneficial Ownership Information (BOI) reporting

A brief guide and my firm's approach

Welcome to this issue of JWellsTax! From productivity to pricing, I empower tax professionals by helping them build thriving solo firms. Thank you to the 185 of you who have subscribed, especially those 9 who have a paid subscription (be sure to check out your bonus section at the end of this post)!

“Money laundering is a very sophisticated crime, and we must be equally sophisticated.”

Janet Reno

We’re just a few weeks away from the new year. That means, among other things, the advent of the Corporate Transparency Act’s requirement for most corporations and limited liability companies (LLCs) to report their beneficial ownership information (BOI).

You’ve probably heard of it, but let’s dive a bit deeper to understand what it entails and how it impacts our role as tax professionals.

What is the Corporate Transparency Act?

Congress passed the Corporate Transparency Act (Title LXIV of the National Defense Authorization Act of 2021, now codified as 31 USC §5336) to counter the proliferation of anonymous registered entities arranged in complex structures, permitting money laundering and financing of terrorism.

The CTA goes into effect on January 1, 2024, and requires every legal entity registered in a US state to submit a BOI report to the Treasury Department’s Financial Crimes Enforcement Network (FinCEN). The report contains information about the reporting company, its beneficial owner(s), and the company applicant.

Which companies need to report?

Every corporation, limited liability company (LLC), or other entity registered with a secretary of state or Indian tribe (or any foreign entity registering to do business with a state or Indian tribe) must submit a BOI report to FinCEN.

Note that some companies are exempt from reporting. Of these, you’re likely working with customers who are eligible for one of these three exemptions in particular:

1. A tax-exempt entity,

2. An inactive entity, or

3. A large operating company, defined as one with over 20 full-time employees (not FTE) and gross revenues over $5 million.

The report includes the following information about the entity:

• Business name,

• Current address,

• State of formation,

• EIN, and

• The following for each direct or indirect beneficial owner: name, address, date of birth, and a unique identifying number from a government-issued ID (nonexpired driver’s license or passport).

Who is a beneficial owner?

A beneficial owner either exercises substantial control over a reporting company or owns or controls at least 25 percent of the ownership interest. NB Review these definitions carefully. Not all equity owners may qualify as beneficial owners, and non-equity officers may qualify as beneficial owners.

An ownership interest can take a variety of forms. For purposes of BOI, ownership can include equity, stock, voting rights, a capital or profit interest, options, convertible instruments, and any other form of ownership.

Substantial control can include a variety of powers, such as exercising the authority of a senior officer, the ability to appoint or remove senior officers, and the power to make important or strategic decisions.

An individual may hold indirect ownership or substantial control through any contract, arrangement, understanding, relationship, or otherwise, including through parent and subsidiary companies. A subsidiary that is not exempt must file its own BOI report.

Five types of individuals are automatically exempt from being considered beneficial owners: minor children; nominees, intermediaries, custodians, or agents; non-equity employees lacking substantial control; those with only a right of inheritance to an ownership interest; and creditors.

Who is a company applicant?

A company applicant is a person who directly files, or is primarily responsible for directing or controlling the filing of, the document that creates or registers the company. NB The applicant is not defined as the person filing the report on behalf of the company. There is no statutory mention of a preparer, reporter, or any such role.

Companies formed before January 1, 2024 will not have to report a company applicant.

When are the initial reports due?

For entities in existence on January 1, 2024, the initial report is due by January 1, 2025.

For entities created in 2024, the initial report is due 90 days after receiving notice of the company’s creation or registration.

For entities created after 2024, the initial report is due 30 days after receiving notice of the company’s creation or registration.

FinCEN will not accept reports prior to January 1, 2024, which is just fine because we don’t have any way of filing reports yet!

What if the information changes from the initial report?

If any information in an initial BOI report changes, the company must file an updated report within 30 days of the change.

Reportable changes include any changes to the name or address of the reporting company, changes to the name or address of a beneficial owner, or a new beneficial owner.

Should tax professionals file BOI reports?

This is a big question within the profession right now. If you’re considering preparing reports for your customers, there are three big questions you need to answer:

1. UPL and insurance Many practitioners, professional associations, and insurance providers have discussed the possibility of filing BOI reports as the unlicensed practice of law (UPL). Personally, I’m unconvinced of that position; however, you should discuss it with your firm’s attorney and insurance provider.

2. Logistics BOI reports require information you may not have in your tax software. Individuals who are not owners or K-1 recipients may qualify as beneficial owners. And the initial reports require information about owners you may not already have, such as dates of birth and unique identifying numbers. You will need a system in place to efficiently and securely request, collect, and maintain this information. Moreover, you will also need to regularly check for any possible changes in the information reported to FinCEN that would necessitate an updated report. (Keep in mind that updated reports are due within 30 days of any necessitating change.)

3. Pricing Filing reports should be compensated work. As such, you will need to develop a pricing system that makes sense for both your firm and your customers.

My firm, JWellsCFO, will not prepare and file these reports for its customers. While doing so might provide some value to customers, I made this decision for the following reasons:

1. BOI reporting is not tax compliance or business strategy. Preparing these reports would distract me from the primary work of my firm.

2. BOI reporting is an administrative burden that would stretch limited capacity. I don’t have the bandwidth to efficiently and securely request, collect, and maintain this information and regularly check for any possible changes. I could build procedures and workflows to do so, but I’d rather focus on developing and improving core processes.

3. BOI reporting does not add enough value to justify a commensurate fee. At least, I can’t figure out how to accomplish this. My opportunity cost in providing this administrative service is substantial, given the much higher-value work I do in my firm. On the other hand, penalty avoidance, which is based solely on meeting relatively straightforward deadlines, is the only real benefit that can be offered. And without a guarantee that the customer will provide updated information to me in real time, I can’t guarantee penalty avoidance. (There is a safe harbor in the law for submitting nonfraudulent incorrect information, but there is no mention of penalty abatement for late filings.)

What to do if you aren’t filing BOI reports

Now, just because my firm won’t file the reports doesn’t mean I’ve abdicated my responsibility to help my customers understand and comply with the requirements.

Here’s what I’m doing to help them:

• I’ve familiarized myself with the law, the regulation, and the FAQs.

• I offered a free webinar presenting necessary information about BOI reports. I invited my two email lists (this one, and my firm’s list, which includes my customers). I’ll share the recording and the slides with my customers. (Paid subscribers: see below the paywall for a link to the slides I presented.)

• I’ll be available throughout the year to answer questions and provide help to my customers.

• I’ll remind them periodically throughout 2024 of the need to file their initial report by the end of the year.

I strongly recommend taking a proactive approach with your customers, whether you intend to file reports or not.

Feel free to share this summary with your colleagues, staff, and customers (please give credit if you do).

Let me know if you’re considering whether to offer BOI reporting as a service. Even though I won’t be, I’m happy to discuss the logistics, pricing, and other aspects of how you could offer this service in your firm.

Thanks for reading this issue of JWellsTax! If you have any questions or topics you’d like me to cover, reply and let me know!