Are there Exemptions under the Corporate Transparency Act?

By: Matthew Brust, Esq.

The Corporate Transparency Act (the “CTA”) does provide for twenty-three (23) different exemptions from reporting Beneficial Owners. This article will briefly touch on several of the exemptions under the CTA, but will not be an exhaustive list of all twenty-three (23) exemptions.

This article assumes that the reader has a basic understanding of the CTA and the terminology of the CTA. It is important to note that if a Reporting Company meets the requirements of an exemption, it does not exempt that Reporting Company from filing a report with FinCEN, rather it exempts the Reporting Company from reporting its Beneficial Owners.

Therefore, the Reporting Company is still required to file a report with FinCEN indicating that it is claiming an exemption. Additionally, any entity that no longer meets the requirements of an exemption will be required to file a report with FinCEN within thirty (30) days from the date the entity lost such exemption.

Tax Exempt Entities

Entities that can meet any of the following requirements will be exempt from reporting its Beneficial Owners:

1. The entity is an organization that is described in section 501(c) (determined without regard to section 508(a) of the Code) of the Internal Revenue Code (the “Code”);
2. The entity is 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 exempt from tax under section 527(a) of the Code;
3. The entity 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; or
4. The entity is a trust described in paragraph (1) or (2) of section 4947(a) of the Code.

A religious organization that is tax-exempt under section 501(d) of the Code will not qualify for this exemption. When looking to qualify for this exemption, entities should be aware of potential CTA reporting obligations during the period after formation of the new tax-exempt entity but before such entity receives determination of its tax-exempt status from the Internal Revenue Service.

During this holding pattern, unless the entity falls under another CTA exemption, the entity will be required to file a BOI report with FinCEN. Additionally, if the tax-exempt entity loses its status and the 180-day period mentioned above has passed or such entity otherwise becomes subject to the reporting requirements, such entity will need to report, among other items, information about its Beneficial Owners.

Entities Assisting a Tax-Exempt Entity

An entity qualifies for this exemption if the entity can meet all four (4) of the following requirements:

1. The entity operates exclusively to provide financial assistance to, or hold governance rights over any tax-exempt entity described above;
2. The entity is a United States person as defined in Section 7701(a)(30 of the Code;
3. The entity is beneficially owned or controlled exclusively by one or more United States persons that are United States citizens or lawfully admitted for permanent residence; and
4. The entity derives at least a majority of its funding or revenue from one or more United States persons that are United States citizens or lawfully admitted for permanent residence.

Large Operating Company

An entity qualifies for this exemption if all of the following requirements are met:

1. The entity employs more than 20 full-time employees in the United States, with “full time employee in the United States” having the meaning provided in 26 CFR 54.4980H-1(a) and 54.4980H-3―except that the term “United States” as used in those sections of the CFR has the meaning provided in 31 CFR 1010.100(hhh);
2.  The entity has an operating presence at a physical office within the United States; and
3. The entity filed a federal income tax or information return in the United States for the previous year demonstrating more than $5 million in gross receipts or sales, as reported as gross receipts or sales (net of returns and allowances) on the entity’s IRS Form 1120, consolidated IRS Form 1120, IRS Form 1120-S, IRS Form 1065 or other applicable IRS form, excluding gross receipts or sales from sources outside the United States, as determined under federal income tax principles.

Under this exemption, a “full-time employee” is anyone employed by the company that averages at least 30 hours per week or 130 hours per month. An employer who leases its employees from a PEO or similar arrangement will not be able to count those “leased” employees as “full-time” employees under this exemption. Therefore, if an entity has 25 “leased” employees, the entity cannot count the 25 “leased” employees for purposes of determining if the entity has 20 or more full-time employees.

For an entity that is part of an affiliated group of corporations within the meaning of 26 USC 1504 that filed a consolidated return, the applicable amount shall be the amount reported on the consolidated return for such group. However, unless and until such an entity has a tax return meeting the gross receipts and sales requirement, it will not be able to take advantage of the “large operating company” exemption. Additionally, having a P.O. Box or other principal address where no business is actually conducted will not be sufficient to establish a “physical operating presence.”

Bank

Any bank that is defined in (A) Section 3 of the Federal Deposit Insurance Act, (B) Section 2(a) of the Investment Company Act of 1940 or (C) Section 202(a) of the Investment Advisers Act of 1940.

Credit Union

Any federal credit union or state credit union, as those terms are defined in Section 101 of the Federal Credit Union Act.

Depository Institution Holding Company

Any bank holding company as defined in Section 2 of the Bank Holding Company Act of 1956 or any savings and loan holding company as defined in Section 10(a) of the Home Owners’ Loan Act.

Insurance Company

Any insurance company as defined in Section 2 of the Investment Company Act of 1940.

State-licensed Insurance Producer

Any entity that:

1. is an insurance producer that is authorized by a state and subject to supervision by the insurance commissioner or similar official or agency of a state, and
2. has an operating presence at a physical office within the United States.

Public Accounting Firm

Any public accounting firm registered in accordance with Section 102 of the Sarbanes-Oxley Act of 2022.

Public Utility

Any entity that is regulated public utility as defined in 26 U.S.C. 7701(a)(33)(A) that provides telecommunications services, electrical power, natural gas, or water and sewer services within the United States.

Inactive Entity

Any entity that:

1. was in existence on or before January 1, 2020;
2. is not engaged in active business;
3.  is not owned by a foreign person, whether directly or indirectly, wholly or partially,
4. has not experienced any change in ownership in the preceding 12-month period,
5. has not sent or received any funds in an amount greater than $1,000, either directly or through any financial account in which the entity or any affiliate of the entity had an interest, in the preceding 12-month period, and
6. does not otherwise hold any kind or type of assets, whether in the United States or abroad, including any ownership interest in any corporation, limited liability company or other similar entity.

It is important to note that this exemption does not apply to inactive entities formed after January 1, 2020, and has other important limitations.

Subsidiary of Certain Exempt Entities

Any entity whose ownership interests are controlled or wholly owned, directly or indirectly by one or more entities that met any of the above discussed exemptions is also exempt under the CTA. Note, additional exemptions fall under this exemption but are not discussed here. The “wholly owned” test is likely to be straightforward to apply; however, the control test may require a more detailed analysis.