Mark A. Limardo, Partner

The U.S. Department of the Treasury (FinCEN) continues to issue important guidance on the Corporate Transparency Act (CTA) through updates to its Frequently Asked Questions. You can find links to the FAQs, the CTA regulations and other CTA guidance in our Corporate Transparency Act Resource Center. 

“Reporting Company” means an entity required to file a “beneficial ownership interest” report (“BOI Report”) under the CTA, absent an applicable exemption.

Here’s a quick summary of what’s new:

No Escape by Liquidation: A Reporting Company cannot avoid filing an initial or additional BOI Report by liquidating before the BOI Report is due. Furthermore, if a Reporting Company formed prior to the CTA’s effective date (January 1, 2024) started but failed to fully complete its liquidation before the CTA’s effective date, the Reporting Company must comply with the CTA before completing its liquidation. So, CTA compliance needs to be added to the checklist of tax and other governmental filings required to liquidate or dissolve a Reporting Company.

No Escape for Administratively-Dissolved Entities: Even if an entity has been administratively dissolved prior to the CTA’s effective date, the administratively - dissolved entity continues to exist for CTA purposes until it is permanently dissolved and can no longer be revived by the payment of unpaid franchise taxes or any other method. Therefore, unless able to qualify for the “inactive entity” or another CTA exemption, an administratively-dissolved entity remains a Reporting Company and must find a way to comply with the CTA.

• Potential Trap: An administratively-dissolved entity qualifies for the CTA “inactive entity” exemption only if the administratively-dissolved entity was originally formed prior to January 1, 2020, and meets certain other requirements (i.e., no activity or assets).

Clarification of the “Large Operating Company” Exemption: To qualify for the “large operating company” exemption, an entity must have at least 20 full-time U.S. employees, maintain a U.S. operating presence, and show at least $5 million of U.S.-source gross receipts on its federal income tax return “for” the previous year. Testing for “large operating company” status occurs an on-going basis at all times.

• “For” actually means “in.” As a result of a glitch between the CTA’s statutory language and FinCEN’s regulatory guidance, the $5 million gross receipts test is measured by referencing the applicable tax return filed in the previous year, not for the previous year. So, for example, if an entity is trying to determine if it is a “large operating company” at time during 2024, the entity must review its 2022 federal income tax return (which was filed in 2023), not its 2023 federal income tax return (which has been or will be filed during 2024). Furthermore, as discussed below, this definitional change delays a newly-created entity’s ability to claim the “large operating company” exemption.

• No Fix for Newly-Created Entities. Because a newly-created entity cannot have a federal income tax return for a previous year, the entity cannot immediately claim the “large operating company” exemption, even if it fully expects to qualify quickly for the exemption. Because “for” now means “in” under the FAQs, a newly-created entity remains obligated to file BOI Reports at least through the end of the calendar year following the calendar year in which the entity was formed. For example, if a limited liability company is formed on January 1, 2025, and meets the employee and gross revenue thresholds by June 30, 2025, it cannot claim the “large operating company” exemption until January 1, 2027, because its tax return for 2025 will be filed in 2026 (which is the year previous to 2027). So, in this example, the newly-created entity remains subject to the CTA for a full 24 months, even though it qualified as a “large operating company” within the first six months of its existence. 

• Failure to meet head count and minimum gross receipts test. Falling below the U.S. employee head count or gross receipts thresholds results in the loss of a previously-claimed “large operating company” exemption, triggering the requirement to file an initial or updated BOI Report. In the case of the gross receipts test, the exemption loss occurs immediately upon the filing of a federal income tax return showing U.S.-source gross receipts of less than $5 million, requiring the entity to file a BOI Report no later than 30 days after the tax return filing. So, a “large operating company” must monitor constantly the impact of any workforce and operational downsizing on its CTA exemption and coordinate its income tax and CTA filing obligations when in danger of failing the gross receipts test.

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© 2024 Herrick, Feinstein LLP. This alert is provided by Herrick, Feinstein LLP to keep its clients and other interested parties informed of current legal developments that may affect or otherwise be of interest to them. The information is not intended as legal advice or legal opinion and should not be construed as such.