Effective January 1, 2024, the United States Corporate Transparency Act (“CTA”) requires the provision of “beneficial owner” information to the Financial Crimes Enforcement Network (“FinCEN”).[1] Significantly, the CTA generally exempts tax-exempt entities from its reporting obligations, along with wholly-owned and wholly-controlled subsidiaries of tax-exempt organizations. But the CTA’s requirements may apply to nonprofits in some surprising ways. Here’s how.
CTA-Mandated Nonprofit Reporting
The CTA’s key reporting implications for nonprofits include the following:
1. Reporting obligations may apply to joint ventures in which nonprofits participate;
2. Taxable nonprofit entities will likely be subject to the CTA’s requirements;
3. The CTA indirectly raises the stakes for nonprofit compliance in filing annual IRS Forms 990, 990-EZ, 990-N;
4. IRS revocation of tax-exempt status (e.g., following an IRS audit) or automatic revocation of an entity’s tax exemption (due to a failure to file annual 990s for three consecutive years) could also unintentionally cause CTA’s coverage.
Penalties for noncompliance include a $500 per-day civil penalty, up to a $10,000 maximum, as well as possible criminal penalties. Existing covered organizations may file their required reports any time during 2024. New organizations formed after January 1, 2025, are subject to the generally applicable 30-day deadline from date of formation.
The CTA heightens an essential legal point per #2 above, namely that nonprofit status exists under state law separate from federal tax exemption. Tax exemption available under the Internal Revenue Code allows a nonprofit organization’s exemption from federal income tax on its net revenues (and for Section 501(c)(3) organizations – qualifying them to receive tax-deductible contributions). Nonprofit status, on the other hand, is a state law concept that depends on the organization's purpose and operations, determined by state-level requirements. The two legal concepts of nonprofit and tax-exempt status are thus quite related, but different, and they find their sources in federal versus state statutory schemes.
Nonprofit leaders thus should be aware of applicable CTA reporting requirements. The following sections further address the CTA’s background and scope, exemptions for tax-exempt entities, and nonprofit compliance pointers for covered organizations.
Reporting Companies and Beneficial Owners
The CTA was enacted by Congress on January 1, 2021, as part of a broader effort to enhance transparency and combat financial crimes such as money laundering and terrorist financing. The CTA mandates reporting requirements for new and existing corporations, LLCs, and other entities filing formation documents with a Secretary of State, each a “reporting company.” Reporting companies are required to disclose their beneficial owners to FinCEN. The term “beneficial owner” is defined as follows:
“with respect to an entity, an individual who, directly or indirectly, through any contract, arrangement, understanding, relationship, or otherwise -
(i) exercises substantial control over the entity; or
(ii) owns or controls not less than 25 percent of the ownership interests of the entity.” 31 USCA 5336(a)(3).
This definition of “beneficial owner” is broadly applicable. It impacts small companies, many of whom have never made federal filings other than with the Internal Revenue Service. For example, under the new law, many personal and other single-member limited liability companies and family businesses will likely need to start filing reports with FinCEN. Additionally, even if the entity has been treated as “disregarded” for tax purposes and treated as part of the owner’s individual activities, the CTA requires the reporting company to report beneficial ownership information (“BOI”) to FinCEN. The information classified as BOI, which required to be reported under the CTA is set forth below in section 4(b).
In the nonprofit context, directors and officers will meet the definitional test of “beneficial owners” (notwithstanding the lack of actual ownership) of nonprofits because they “exercise substantial control” over the organizations they lead. Consequently, absent an applicable exemption, such directors and officers will need to be reported as beneficial owners on the nonprofit’s BOI report.
Exemptions for Nonprofits and Their Subsidiaries
In most cases, tax-exempt nonprofit entities are not considered “reporting companies” and thus are exempt from the BOI reporting requirements. More specifically, the CTA exempts certain entities based on (1) such entities’ tax-exempt status and (2) any subsidiary relationships to other exempt entities.
Exemption for tax-exempt entities
With respect to (1) above, importantly, the exemptions are dependent not to an entity’s status as a nonprofit under state law, but rather due to its status under federal law as tax exempt under section 501(c) of the Internal Revenue Code (“Code”).[2] Section 501(c)(3) public charities and private foundations therefore should be exempt from CTA’s reporting requirements. On the other hand, however, organizations that are organized as nonprofit corporations but are taxable under federal law are required to report under the CTA.
Notably, the CTA provides that the exemption is “determined without regard to section 508(a)” of the Code. Section 508(a) requires new organizations described under 501(c)(3) to notify the IRS that they are applying for official recognition of such tax-exempt status. The exemption under the CTA therefore should apply to new nonprofits organizations, which may not have yet applied for recognition of exemption,[3] or that which may not have received an IRS determination letter (e.g., churches).
Exemption for certain subsidiary organizations of exempt entities.
Additionally, the term “reporting companies” does not include entities that are owned or controlled, directly or indirectly, by one or more entities exempt from federal income tax under section 501(c) of the Code.[4] For nonprofits using subsidiaries and leveraging multicorporate structures, recognizing this aspect is a critical aspect of compliance. Tax-exempt entities often establish a variety of subsidiary organizations, including some taxable ones not covered under section 501(c), to fulfill their nonprofit objectives. However, these subsidiaries should qualify for an exemption from the CTA’s reporting requirements if they are owned, directly controlled, or indirectly controlled by organizations that qualify for exemption under section 501(c).
Consider the example of a tax-exempt charity that provides meals to families facing food insecurity and which also owns and operates a taxable LLC that sells produce. Even if the produce company would be separately considered a reporting company under the CTA, it would be exempt from the CTA's reporting requirements because it is wholly owned by the charity. Other examples may raise related nuances and significant legal implications, which should be evaluated carefully based on each nonprofit situation.
Situations in Which Nonprofits Might Be Required to Report under CTA.
Despite the broad exemptions for nonprofits under the CTA, certain situations involve reporting obligations for nonprofit entities and or their related entities as follows.
Joint venture structures: certain affiliations, partnerships, limited liability companies, and related corporations
Sometimes to promote their charitable objectives, nonprofits may engage in joint ventures with diverse partners, entities, and individuals, some of which are not exempt from BOI reporting under the Act. In such cases, despite some ownership or control by the exempt nonprofit, the presence of one or more non-exempt persons is enough to trigger the CTA reporting obligations for the joint venture.
Suppose, for example, a section 501(c)(3) public charity forms an LLC entity with a small manufacturing business to develop and sell a line of goods or services for profit.[5] Even though the charity itself is exempt from CTA reporting obligations, the joint venture LLC would not be exempt, due to the part ownership by a non-exempt entity or person. In the same way, charities may engage in affiliations, partnerships, and a wide variety of corporate transactions, where each involved entity must independently assess its CTA reporting obligations based on its ownership structure and the exemption criteria set forth by the Act.
Taxable nonprofit entities
As noted above, CTA exemption derives from federal tax exemption under section 501(c), not from the entity’s nonprofit form under state law. While taxable nonprofits may be relatively uncommon, they can play an important role in the nonprofit sector. Key pointer: taxable nonprofit corporations are covered by the CTA’s reporting requirements.
Tax-exempt revocation
One CTA “sleeper issue” of which nonprofit leaders should be aware relates to unintended CTA-related risks arising from revocation of tax-exempt status. An IRS revocation arising from an audit is extremely rare; not so, however, for auto-revocations. More specifically, tax-exempt entities are subject to automatic revocation of their tax-exempt status if they fail to file their required annual information returns or notices (990s) for three consecutive years.[6] The revocation is effective as of the filing due date of the third annual return or notice that was not filed. To prevent such adverse consequence, tax-exempt organizations must ensure they file their annual returns, such as the IRS Form 990 series, within the prescribed deadlines each year. If an organization's tax-exempt status is revoked, it is no longer exempt from federal income tax and must reapply for tax-exempt status if it wishes to regain it. Retroactive reinstatement of tax-exempt status is possible but by no means assured.
Per the CTA, organizations with revoked tax-exempt status become "reporting companies" 180 days after the loss of exempt status. In many cases, nonprofit leaders may not be aware that the organizations they serve have been auto-revoked, especially since the follow-up IRS notification may be slow in coming. Nonprofits may further be unaware of the resulting CTA reporting requirement.
In view of the above risks, it is imperative for nonprofit leaders to carefully monitor their organization’s compliance with IRS Form 990 (or 990-EZ or 990-N, depending on annual revenues) filing requirements.[7] Remaining vigilant in this regard not only safeguards the organization’s tax-exempt status but also circumvents the charity’s potential transition into a “reporting company” under the CTA. Proactive measures, such as setting up internal reminders and reviews for filing deadlines, can serve as critical safeguards against inadvertent status changes and the consequent regulatory obligations.
Summary of BOI Reporting Obligations
If one of the above situations or other applicable considerations make BOI reporting compliance necessary under the CTA, the organization’s leaders should promptly gather the required information and submit its report to FinCEN to avoid potential penalties for non-compliance, which may have both civil and criminal aspects under the statute. The following provides a summary of such BOI reporting-related obligations.
Initial Filing Deadlines:
• Existing entities formed or registered before January 1, 2024, have until January 1, 2025, to file.
• New entities registered in 2024 must file within 90 days post-registration.
Reporting Requirements:
• Only one report is necessary unless there are changes or corrections to be made to the beneficial ownership information.
• For beneficial owners the following information must be reported (collectively “BOI”): legal name, date of birth, address, and an identifying number from approved documents like a U.S. passport or driver’s license, including an image of the identification.
Company Information:
• The organization must also file its own details, including names and addresses.
• For entities created on or after January 1, 2024, information regarding the individuals who filed for the company's formation is required.
Pointers in Summary
Tax-exempt nonprofit organizations should be aware that while they are generally exempt from the CTA’s reporting requirements, such exemptions may not be applicable in certain circumstances. Specifically, CTA compliance obligations may arise for taxable nonprofits from certain activities such as joint ventures or resulting from the loss of tax-exempt status. On this latter point, the new CTA exemptions underscore the importance of annual IRS Form 990 filings in maintaining tax-exempt status – for those tax-exempt organizations subject to such filing requirements. When CTA compliance obligations are triggered, nonprofits should be mindful of timing-related requirements and accurately report beneficial owner and company information.
[1] See 31 U.S.C. 5336. For the most recent FinCEN-promulgated rules, see here.
[2] See 31 USCA 5336(a)(11)(B)(xix), which provides that “Reporting Company' does not include ...(xix) Any (I) organization that is described in section 501(c) of the Internal Revenue Code of 1986 (determined without regard to section 508(a) of such Code) and exempt from tax under section 501(a) of such Code, except that in the case of any such organization that loses an exemption from tax, such organization shall be considered to be continued to be described in this subclause for the 180-day period beginning on the date of the loss of such tax-exempt status; (II) political organization (as defined in section 527(e)(1) of such Code) that is exempt from tax under section 527(a) of such Code; or (III) trust described in paragraph (1) or (2) of section 4947(a) of such Code…”
[3] Such IRS recognition under section 501(c)(3) of the Code is obtained by filing Form 1023 or 1023EZ, and other types of tax-exempt recognition is obtained by filing Form 1024 or Form 1024A. Organizations described under section 501(c)(3) of the Internal Revenue Code normally have 27 months from the date of incorporation to file for recognition of exemption under 501(c)(3) to receive such recognition that is retroactive to the date of incorporation. Churches, other religious houses of worship, associations thereof, and mission societies are exempt from such IRS application requirements. Please see our law firm’s related blog articles for more information about IRS Form 1023 and IRS Form 1024 applications.
[4] See 31 USCA 5336(a)(11)(B)(xxii).
[5] Typically, a “blocker entity” is used, such as a limited liability company subsidiary of the parent charity. In turn, the limited liability company should elect to be taxed as a c-corporation, to protect the parent charity’s tax-exempt status from commercial activity arising from the joint venture’s operations. For more information about using LLCs within a nonprofit context, please see our law firm’s related blog article.
[6] Notably, churches, other religious houses of worship, associations thereof, and mission societies are exempt from IRS Form 990 reporting requirement per Section 508 of the Code. Our law firm’s related blog articles provide more information about IRS Form 990 reporting requirements and auto-revocation.
[7] IRS-recognized tax-exempt organizations may check tax-exempt status on the IRS Tax Exempt Organization Search. Further information about which IRS 990 series report may apply to an exempt organization for a given tax period can be found here.
