The Corporate Transparency Act (CTA) and Tax-Exempt Organizations

This year, a new congressional act has drawn a good deal of attention in the corporate world: the Corporate Transparency Act (CTA). But what does it have to do with tax-exempt organizations? Potentially, a lot. After all, many nonprofits are organized as LLCs or corporations—just the do-good kind. 🙂 In this post, I’ll attempt to explain what the CTA is and what it may require of nonprofits.

Effective from January 1, 2024, the CTA introduces new beneficial ownership reporting requirements aimed at increasing transparency in the corporate landscape. The legislation primarily targets entities at risk for financial crimes. While the CTA predominantly applies to for-profit entities, tax-exempt organizations are subject to nuanced exemptions that require careful attention.

Exemptions for Tax-Exempt Entities

Tax-exempt organizations are generally exempt from CTA reporting requirements—and exemption which applies to entities recognized under Section 501(c) of the Internal Revenue Code—provided they maintain their tax-exempt status. Notably, it appears that tax-exempt entities do not need to report to FinCEN that they qualify for an exemption if they have always been exempt, reducing administrative burdens for longstanding tax-exempt organizations. However, tax-exempt entities that lose their exempt status after January 1, 2024, must file beneficial ownership information (BOI) reports with FinCEN if they do not regain their tax-exempt status within 180 days. This creates a narrow window for organizations to restore their exempt status before they are subject to reporting obligations.

Implications for Newly Formed Tax-Exempt Entities

Organizations formed after the January 1, 2024, effective date of the CTA face different challenges. These newly established entities typically do not receive recognition of tax-exempt status from the IRS within the 90-day window that FinCEN grants for submitting an initial BOI report. All this to say that newly formed entities pursuing tax-exempt status potentially may be subject to BOI reporting requirements before receiving an IRS determination letter.

Subsidiaries of Tax-Exempt Entities

Subsidiaries wholly controlled by tax-exempt organizations are also exempt from BOI reporting requirements under FinCEN’s guidance and the statute. This exemption applies to subsidiaries wholly owned by tax-exempt entities, such as a C corporation or an LLC where the tax-exempt entity is the sole shareholder or member.

However, FinCEN’s guidance on what constitutes “control” of a subsidiary is somewhat limited. FinCEN adds the term “wholly” to modify “control” in its guidance, but that modifier isn’t present in the statute. From this, one could reason that the tax-exempt parent must entirely control the ownership interests in the subsidiary. But it raises questions in joint ventures where ownership is shared between a tax-exempt entity and a for-profit entity. Whether these partially owned entities qualify for an exemption from the reporting requirements—and what proportion of ownership must be met to exempt it—is not entirely clear.

In Summary

While many tax-exempt entities are potentially shielded from the reporting obligations, maintaining exempt status is crucial to avoid falling into the purview of the CTA’s BOI requirements. Even though current legal challenges as to the constitutionality of the CTA could impact the viability of the act, organizations should still implement careful monitoring processes to stay compliant, particularly if their status changes or they enter into joint ventures. For more detailed information on the CTA’s requirements, visit FinCEN’s BOI FAQ page.

Christopher J. Ryan, Jr.

Indiana University Maurer School of Law