Category: Corporate Transparency Act

Who Is Affected By The Corporate Transparency Act?

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The recently passed Corporate Transparency Act (CTA) has significant implications for various entities and individuals involved in the corporate world. This landmark legislation aims to increase transparency and combat illicit activities such as money laundering, tax evasion, and terrorism financing. Let’s explore the key stakeholders impacted by the CTA.

1. Corporations and Limited Liability Companies (LLCs):

Corporations and LLCs are directly affected by the CTA as they are required to comply with the new reporting requirements introduced by the act. Specifically, companies incorporated or registered in the United States must now disclose their beneficial ownership information to the Financial Crimes Enforcement Network (FinCEN), which is part of the U.S. Department of the Treasury. This information includes the identities and ownership percentages of individuals who directly or indirectly control the company.

2. Beneficial Owners:

Beneficial owners are individuals who have a substantial interest or control over a company but may not be publicly listed as official owners. The CTA mandates these individuals to report their ownership details to FinCEN, thereby increasing transparency in corporate structures. Failure to comply with these reporting requirements could result in penalties and legal consequences.

3. Financial Institutions:

Financial institutions play a crucial role in implementing the CTA. They are responsible for verifying the beneficial ownership information submitted by corporations and LLCs and reporting any suspicious activities to FinCEN. The act enables financial institutions to better understand their clients and identify potential risks associated with money laundering or terrorism financing. To comply with the CTA, financial institutions need to update their internal processes and systems to capture and maintain beneficial ownership information.

4. Law Enforcement Agencies:

Law enforcement agencies are significant beneficiaries of the CTA. By having access to detailed beneficial ownership information, they can enhance their efforts in combating financial crimes. This Act equips law enforcement agencies with valuable data to investigate and identify individuals or entities engaged in illicit activities. Consequently, the CTA provides the necessary tools to trace and halt the illegal flow of funds throughout the country.

5. Real Estate Industry:

The real estate sector also comes under the purview of the CTA. Previously, individuals looking to hide illicit assets could use anonymous real estate transactions to conceal their ownership. However, the CTA has now expanded the reporting requirements to include high-value residential real estate transactions as well. Companies involved in real estate transactions, such as brokers, title companies, and developers, must adhere to the CTA’s guidelines and report necessary information to FinCEN.

6. Non-Governmental Organizations (NGOs):

NGOs are subject to the CTA if they operate as corporations or LLCs. This legislation ensures that even non-profit organizations are transparent and accountable for their financial activities. By disclosing beneficial ownership information, NGOs contribute to combating illicit practices within the sector, such as money laundering and illicit donations.

7. Professionals Providing Services to Companies (Accountants, Lawyers, etc.):

Professionals who regularly assist companies in their legal, accounting, or financial matters are also impacted by the CTA. They must perform due diligence measures while working with corporations or LLCs to ensure compliance with the act. This includes verifying beneficial ownership information and ensuring accurate reporting to FinCEN. Failure to fulfill these obligations may lead to reputational damage and legal consequences for the professionals involved.

Summary

The Corporate Transparency Act affects a wide range of stakeholders in the corporate world. From corporations and beneficial owners to financial institutions and real estate brokers, the act aims to increase transparency, deter illicit activities, and strengthen the overall integrity of the U.S. financial system. By ensuring transparency and accountability, the CTA contributes to a safer and more secure business environment for all involved.

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New FinCEN Filings Go into Effect on January 1 

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For existing businesses, the Corporate Transparency Act (CTA) goes into effect on January 1, 2024, and imposes a brand-new federal filing requirement on most corporations, limited liability companies, and limited partnerships and on certain other business entities.  

No later than December 31, 2024, all non-exempt business entities must file a beneficial owner information report (BOI report) with the Financial Crimes Enforcement Network (FinCEN)—the Treasury Department’s financial intelligence unit. 

The BOI reports must disclose the identities and provide contact information for all of the entity’s “beneficial owners”: the humans who either (1) control 25 percent of the ownership interests in the entity or (2) exercise substantial control over the entity.  

Your BOI report must contain all the following information for each beneficial owner: 

FinCEN will create a new database called BOSS (Beneficial Ownership Secure System) for the BOI data and will deploy the BOSS to help law enforcement agencies prevent the use of anonymous shell companies for money laundering, tax evasion, terrorism, and other illegal purposes. It will not make the BOI reports publicly available. 

The CTA applies only to business entities such as corporations and LLCs that are formed by filing a document with a state secretary of state or similar official. It also applies to foreign business entities that register to do business in the United States. 

Some businesses are exempt from the CTA, including  

The CTA does not apply to sole proprietors or general partnerships in most states. But it does apply to single-member LLCs, even though the tax code disregards such entities and taxes them on Schedule C, E, or F of Form 1040. 

The initial BOI report filing does not expire, and you don’t need to renew it. But you have an ongoing duty to keep the BOI report up to date by reporting any changes to FinCEN within 30 days of occurrence. 

Failure to comply can result in hefty monetary penalties and up to two years in prison. 

Beat the Net Investment Income Tax  

Here is some important information regarding the net investment income tax (NIIT), which may be relevant to your financial situation. 

NIIT Overview 

The NIIT is a 3.8 percent tax that could apply if your modified adjusted gross income (MAGI) exceeds $200,000 (single filers), $250,000 (married, filing jointly), or $125,000 (married, filing separately). It targets the lesser of your net investment income or the amount by which your MAGI exceeds the thresholds. 

What Qualifies as Net Investment Income? 

Net investment income includes income from investments (such as interest, dividends, and annuities), net rental income, and income from businesses in which you don’t materially participate. It does not include wages, self-employment income, tax-exempt income, and distributions from qualified retirement plans. 

Reducing or Avoiding the NIIT 

To mitigate the NIIT, it’s crucial to understand what’s triggering it—your net investment income or your MAGI. Here are some strategies: 

  1. Invest in municipal bonds. Pick bonds that are exempt from the NIIT and from federal and state taxes. 
  2. Donate appreciated assets. The correct asset donation avoids the NIIT and provides a tax deduction. 
  3. Avoid selling appreciated stock. Buy growth stocks that don’t pay dividends, and hold them.  
  4. Utilize Section 1031. It avoids MAGI and net investment income, and defers taxes. 
  5.  Invest in life insurance and annuities. This typically defers tax until withdrawal. 
  6. Harvest investment losses. This can offset gains and reduce taxable income. 
  7. Invest in rental real estate. Structured correctly, this can minimize taxable income. 

Other Strategies 

The NIIT can be complex, but strategic planning can significantly reduce its impact. 

Deducting Start-up Expenses for a Rental Property 

Are you interested in becoming a commercial or residential landlord?  

If so, you’ll likely have to shell out plenty of money before ever collecting a dime in rent. The tax code treats some of those monies as start-up expenses. 

Start-up expenses are some of the costs you incur before you offer a property for rent. There are two broad categories: 

  1. Investigatory  
  2. Pre-opening costs, such as advertising, office expenses, salaries, insurance, and maintenance costs 

Your cost of purchasing a rental property is not a start-up expense. Rental property and other long-term assets, such as furniture, must be depreciated once the rental business begins. 

On the day you start your rental business, you can elect to deduct your start-up expenses. 

The deduction is equal to 

When you file your tax return, you automatically elect to deduct your start-up expenses when you label and deduct them on your Schedule E (or other appropriate return).  

Costs you pay to form a partnership, limited liability company, or corporation are not part of your start-up expenses. But under a different tax rule, you can deduct up to $5,000 of these costs the first year you’re in business and amortize any remaining costs over the first 180 months you are in business. 

Note that the cost of expanding an existing business is a business operating expense, not a start-up expense. As long as business expansion costs are ordinary, necessary, and within the compass of your existing rental business, they are deductible. 

The IRS and tax court take the position that your rental business exists only in your property’s geographic area. So, a landlord who buys (or seeks to buy) property in a different area is starting a new rental business, which means the expenses for expanding in the new location are start-up expenses. 

You can’t deduct start-up expenses if you’re a mere investor in a rental business. You must be an active rental business owner to deduct them.