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The Federal Government is taking new steps to attack suspected tax evasion and fraud schemes. The most recent of these efforts is expected to take effect later this year, with wide-ranging implications for how much information business entities must provide on their owners.
This new law is expected to impact small businesses, as smaller corporate entities are more likely to be shell corporations that the law intends to target. Even if you have remained compliant in the past, new requirements must be attended to if invasive government action is to be avoided.
When dealing with complex new regulation, you will want a seasoned dual licensed Tax Attorney and CPA on your side. Call the Tax Law Offices of David W. Klasing at (800) 681-1295 to schedule your first-time case assessment for a reduced rate or schedule online here.
The Corporate Transparency Act, or CTA for short, is a new law passed in 2021 that requires corporate entities like LLCs and others to provide information about their owners and members to the Treasury Department’s Financial Crimes Enforcement Network, better known as FinCEN.
The CTA is part of a major government effort to crack down on corruption, money laundering, terrorist financing, tax fraud, and other illicit activity. The CTA targets the use of anonymous shell companies that facilitate the flow and sheltering of illicit money in the United States.
The legislation package attempts this through new requirements for these companies for disclosure practices, specifically concerning ownership interests. Very few states have laws that require business entities to disclose information about beneficial owners or founders, and the CTA is the first federal effort in this area.
The CTA empowers FinCEN to establish a massive database containing beneficial owner information for most types of smaller business entities. These include U.S.-based businesses and foreign entities that register to do business in the U.S. The database will not be publicly accessible; it is solely for the use of law enforcement, national security and intelligence agencies, and federal regulators enforcing anti-money-laundering laws.
The primary focus of the CTA is smaller business entities, which are more likely to be shell companies, or business entities erected solely for privacy and advantageous corporate structure rather than earning individual profits.
To narrow down the scope of the CTA, there are more than 20 exemptions that will apply to various types of businesses. This includes banks, credit unions, securities trading firms, and many other companies in the financial services sector. Generally, any entity with more than 20 full-time employees will not fall under the CTA’s disclosure requirements. The same goes for entities with a physical presence at a business office in the U.S., as well as those whose previous year’s federal tax return shows more than $5 million in gross receipts or domestic sales.
If you are not sure whether your business will be subject to the CTA’s new disclosure requirements, be sure to bring your questions to the attention of a seasoned Dual Licensed Tax Attorney and CPA.
FinCEN has only recently issued regulations that propose their implementation and enforcement strategies of the CTA. These new revelations create several surprises for small business owners.
FinCEN has determined that the CTA as written will apply to corporations and limited liability companies, including the almost 2.5 million LLCs that have only one member and are taxed as Schedule C sole proprietorships (“disregarded entities”).
But the CTA will also apply to any other non-exempt entity that is created through filing with a secretary of state or other applicable state agency. This will include partnerships, limited liability partnerships, and business trusts, to name a few.
The only two of these types of entities that may not require filing with the state for creation are sole proprietorships (which make ownership information apparent on their own) and general partnerships. According to FinCEN’s estimates, the total number of affected business entities could reach as high as 30 million.
Under statutory definition, a beneficial owner is any person that actually owns or controls a business entity. The CTA requires businesses to file a “beneficial owner information” report that includes personal information about all beneficial owners, such as names, birth dates, street addresses, and official identifying numbers from driver’s licenses and passports. Entities may have more than one beneficial owner, so it is important to know how the law classifies these individuals.
A beneficial owner is someone who either owns at least 25% of the business or who exercises substantial control over the company. This includes senior officers, boards of directors, or anyone who has material say in business functions such as major expenditures, investments, corporate organization, or the ability to enter into significant contracts, to name a few.
The expectation is that the regulations created by the CTA will be finalized sometime in the second half of 2022. The practical effects of the new legislation will apply differently to new companies versus existing ones.
For new companies, beneficial owner information reports will be expected within 14 calendar days after their formation. Existing companies have up to one year from the date that the regulations take effect to file their initial report, meaning that the deadline will likely fall in the later part of 2023. However, because these laws are not yet finalized, the specific deadline is not certain.
Remaining compliant in today’s corporate tax world requires a constant eye on developments in legislation. To schedule a reduced rate initial consultation and learn more about our services and how they can benefit you, call the Dual Licensed Tax Attorneys and CPAs at the Tax Law Offices of David W. Klasing today at (800) 681-1295 or schedule online here.
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