At a Glance
- There is an exemption from CTA reporting requirements for existing tax-exempt entities.
- Most tax-exempt entities that are formed after January 1, 2024, should be exempt from the CTA’s BOI reporting requirements even before receiving an IRS determination letter confirming the tax-exempt status.
- Tax-exempt entities that lose their tax-exempt status and do not get it reinstated within 180 days lose their CTA exemption and must file BOI reports.
- There is also an exemption from CTA reporting requirements for certain subsidiaries of tax-exempt entities.
- It is prudent for all entities exempt from the CTA BOI reporting requirements to regularly monitor whether their exemption continues to apply. Existing and newly formed entities should also consider maintaining a checklist or policies to monitor an entity’s exempt status or information reported on a BOI report.
Background on CTA
Under the Corporate Transparency Act (CTA), which went into effect on January 1, 2024, domestic entities formed under U.S. law and foreign entities qualified to do business in the U.S. must file with the Department of Treasury’s Financial Crimes Enforcement Network (FinCEN) certain beneficial owner information, entity information and “company applicant” information, unless they qualify for an exemption. The CTA was enacted into law by Congress on January 1, 2021, as part of the National Defense Authorization Act for the Fiscal Year 2021 to help prevent and combat money laundering, terrorist financing, corruption, tax fraud and other illicit activity by requiring “reporting companies” to disclose beneficial ownership information (BOI) about their “beneficial owners” to FinCEN.
The CTA lists 23 types of entities that are exempted from the term “reporting company” and therefore not subject to the filing requirements. CTA reporting exemptions generally apply to larger companies or other entities that are already subject to heavy regulation and government oversight. As leaders of nonprofit organizations can attest, tax-exempt organizations are certainly subject to government regulation and oversight, and one of the CTA’s exemptions (exemption number xix) applies to tax-exempt entities and another applies to subsidiaries of tax-exempt entities (exemption number xxii).
Even though organizations exempt from tax under section 501(c) of the Internal Revenue Code of 1986 (Code) are exempt from the filing requirements of the CTA, such organizations should still monitor their exempt status, and be cognizant of circumstances in which the reporting requirements of the CTA could still apply.
Exemption for Tax-Exempt Entities
An exempt “tax-exempt entity” under the CTA includes:
- An organization that is described in [Code] section 501(c) (determined without regard to section 508(a) of the Code) and exempt from tax under section 501(a) of the Code
- An organization that is described in section 501(c) of the Code, and was exempt from tax under section 501(a) of the Code, but lost its tax-exempt status less than 180 days ago
- An entity that is a political organization, as defined in section 527(e)(1) of the Code, that is exempt from tax under section 527(a) of the Code
- An entity that is a trust described in paragraph (1) or (2) of section 4947(a) of the Code
Existing Tax-Exempt Entities
Based upon information from the FinCEN BOI FAQ page online, found here, an entity does not need to report to FinCEN that it is exempt from the BOI reporting requirements if it has always been exempt. Accordingly, entities that were recognized as exempt from tax under 501(c) of the Code before January 1, 2024, should not need to file a BOI report and should not have any other filing requirements (so long as they retain their exempt status). If, however, a tax-exempt entity loses its tax-exempt status after January 1, 2024, and does not get its exempt status reinstated within 180 days, then it will be required to submit the necessary BOI information to FinCEN.
Newly Formed Tax-Exempt Entities
Entities that are formed after the January 1, 2024, effective date of the CTA will typically not receive recognition from the IRS of their exempt status within the window of time (90 days in 2024, and 30 days for entities formed on or after January 1, 2025) that new entities have to complete an initial BOI report. Nevertheless, most newly formed entities that will eventually be recognized as tax-exempt by the IRS should qualify for the CTA’s tax-exempt entity exemption even before they have received an IRS determination letter or even submitted an application for recognition of exempt status (i.e., Form 1023, 1024 or 1024-A).
Some types of 501(c) entities are permitted to self-declare their exempt status and are thus described in 501(c)(3) even without recognition by the IRS (e.g., 501(c)(4), (c)(5), and (c)(6) organizations). Therefore, such entities would qualify for the tax-exempt entity exemption and have no BOI reporting requirement (provided that they do not subsequently lose their exempt status).
Entities described in 501(c)(3) are the most common type of 501(c) entity. Although almost all 501(c)(3) entities typically must receive recognition by the IRS before they are treated as “described in 501(c)(3),” the language of the CTA exemption specifically removes this requirement by disregarding the language of Code section 508(a). Accordingly, an entity that otherwise meets the requirements to be described in 501(c)(3) should be entitled to the exemption from the CTA and BOI reporting even before it applies for or receives an IRS determination letter. It thus should not need to file any BOI reports (as long as it does not subsequently lose its tax-exempt status).
There is some ambiguity about whether certain types of 501(c) entities are considered to be described in Code section 501(c) without first being recognized by the IRS. Therefore, it is prudent for the founders of a new 501(c) entity to assess whether or not the tax-exempt entity exemption applies. In the event there is any question, or to ensure avoidance of any potential penalties, a new entity could opt to submit an initial BOI report with FinCEN. Then, once the entity receives its IRS determination letter confirming it is tax-exempt under Code section 501(a) and described in 501(c) and therefore exempt from CTA’s reporting requirements, the entity in question could file an updated BOI report to indicate that it is newly exempt from the reporting requirements. An updated BOI report for a newly exempt entity will only require that the entity: (1) identify itself; and (2) check a box noting its newly exempt status.
Subsidiaries of Tax-Exempt Entities
Subsidiaries of certain types of entities that are exempt from the beneficial ownership information reporting requirements may also be exempt from the CTA’s BOI reporting requirement (exemption number xxii). An entity qualifies for the subsidiary exemption if the entity’s ownership interests are controlled or wholly owned, directly or indirectly, by an exempt entity described in the CTA (including any tax-exempt entity). Under this rule, a wholly owned subsidiary of a tax-exempt entity (e.g., a C corporation of which the tax-exempt entity is the sole shareholder, or an LLC of which the tax-exempt entity is the sole member) is also exempt from CTA reporting requirements.
While the CTA exempts controlled subsidiaries of tax-exempt entities, neither the CTA nor its regulatory preamble explicitly define “control.” FinCEN’s FAQs provide limited guidance on the definition of control: “control of ownership interests means that the exempt entity entirely controls all of the ownership interests in the reporting company, in the same way that an exempt entity must wholly own all of a subsidiary’s ownership interests for the exemption to apply.” However, additional guidance may be found in the CTA’s language that defines related terms in the context of an individual’s relationship to a reporting company. For example, the statute defines “ownership or control of ownership interest” in the context of defining beneficial owners using language that tracks the CTA’s subsidiary exemption. Under this definition, an individual may “own or control an ownership interest” in a reporting company through a contract, arrangement, understanding, relationship or otherwise, including through ownership or control of intermediary entities that separately own or control the entity’s ownership interests. Though the word “wholly” is not used in the statute to modify “controlled,” FinCEN’s FAQs specify that for the control element of the subsidiary exemption to be satisfied, an exempt entity must control all of the subsidiary’s ownership interests.
Whether or not a subsidiary is exempt when owned only partially by a tax-exempt entity should be determined on a case-by-case basis. There could exist limited occasions — namely when a tax-exempt entity enters into a joint venture with a for-profit entity that otherwise qualifies for an exemption under the CTA — when the JV entity might qualify for the subsidiary exemption even if the tax-exempt entity does not own all of the interests in the JV entity.
It is prudent for all entities exempt from the CTA BOI reporting requirements to regularly monitor whether their exemption continues to apply. Existing and newly formed entities should also consider maintaining a checklist or policies to monitor an entity’s exempt status or information reported on a BOI report.
Requirements for Entities Not Exempt From CTA Reporting
Reporting companies (entities that are not exempt under the CTA) that are formed or registered on or after January 1, 2024, have 90 days to report BOI (e.g., name, DOB, residential address, driver’s license or passport number), certain entity information about the reporting company, and “company applicant” information to FinCEN. Reporting companies existing prior to January 1, 2024, have until January 1, 2025, to report BOI and certain entity information about the reporting company (but not “company applicant” information). Entities formed or registered on or after January 1, 2025, will have 30 days to file initial reports with FinCEN. For more information about the reporting requirements set out under the CTA, including who is considered a beneficial owner and company applicant, please see the client alert linked here.
Non-exempt reporting companies must submit their reports through an online portal on the FinCEN website, which is available at Beneficial Ownership Information Reporting | FinCEN.gov. No filing fees are required for submitting reports. After filing, reporting companies are not expected to file periodic reports, but must submit corrected or updated reports to fix errors and report any changes that arise after filing the initial report.