Update: A Texas federal court has issued a nationwide preliminary injunction blocking enforcement of the Corporate Transparency Act (CTA). For more details on the ruling and its implications, read our latest article here.
As you may recall from our previous articles (here and here), newly enacted laws, at both the federal level and in New York State, require certain entities to file beneficial ownership information (BOI) reports to prevent against money laundering, financing of terrorism, and other illicit and fraudulent activities. These laws are the federal Corporate Transparency Act (CTA) and the New York LLC Transparency Act (NY LLCTA). Much coverage of these laws to date have been silent regarding their applicability to tax-exempt organizations, so as we approach the January 1, 2025, deadline to submit the federal-level BOI reports for entities that were formed before January 1, 2024, many organizations are now wondering if these laws apply to them.
Federal Level BOI Reporting as Required by the CTA
There are 23 types of organizations that are exempt (see exemptions here) from the federal BOI reporting requirements. Five of these types are broadly relevant to tax-exempt organizations: #4 credit union, #19 tax-exempt entity, #20 entity assisting a tax-exempt entity, #22 subsidiary of certain exempt entities, and #23 inactive entity. In this article we’ll dive into these five types of exempt entities so your organization can determine whether you are exempt from reporting.
- For purposes of exemption from reporting under the CTA, credit unions include both federal credit unions and state credit unions as defined in section 101 the Federal Credit Union Act.
- Tax-exempt entities are defined by the CTA as any of the following: organizations described in section 501(c) and exempt from tax under section 501(a) of the Internal Revenue Code of 1986 (the Code), political organizations defined in section 527(e)(1) and exempt from tax under section 527(a) of the Code, or trusts described in sections 4947(a)(1) or 4947(a)(2) or the Code.
- Entities assisting a tax-exempt entity are entities that operate exclusively to provide financial assistance to, or hold governance rights over, any tax-exempt entity (as defined above), are a United States corporation, are beneficially owned or controlled exclusively by one or more United States persons that are United States citizens or lawfully admitted for permanent residence, and 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.
- Any entity whose ownership interests are controlled or wholly owned, directly or indirectly, by a credit union or a tax-exempt entity (but not an entity assisting a tax-exempt entity), is a subsidiary and is also exempt from the BOI reporting requirements.
- Lastly, an inactive entity that was in existence on or before January 1, 2020, not engaged in active business, not owned by a foreign person directly or indirectly, has not experienced any change in ownership in the last twelve months, has not sent or received more than $1,000 in the last twelve months, and does not otherwise hold any kind or type of assets (including any ownership interest in any corporation, limited liability company, or other similar entity) is exempt from the BOI reporting requirements.
The above definitions should allow for most tax-exempt organizations to fairly easily determine federal-level reporting requirements, if any, for themselves and any related entities. However, any related entity with multiple owners, any entity seeking exemption as an entity assisting a tax-exempt entity, and any organization just not sure whether they qualify for a reporting exemption should seek legal counsel to assist with this determination, as penalties for noncompliance are severe. Common industries where control of a subsidiary may not be clear include the healthcare industry (such as physician practices owned by physicians, but control has been delegated to a hospital by contract) and the low-income housing industry (where investors typically own substantially all of the ownership interests of a project as a limited partner, but a tax-exempt entity may be the general partner).
For newly formed entities, the need to file a BOI report may be even sooner than the initial January 1, 2025, deadline for existing entities. Specifically, for any entity formed after January 1, 2024, any required BOI reports are due within 90 days of registration, and for any entity formed in future years that timeline is even tighter, with BOI reports due within 30 days of registration So, any organizations that formed a new entity in 2024 should make this determination as soon as possible to limit or prevent penalties. Federal-level BOI reports are not due annually, but they must be updated if there is a change to any previously reported information about the company or its beneficial owners. Updated reports are due within 30 calendar days of the change occurring or after the company becomes aware or has reason to become aware of any inaccuracies.
NYS Level Reporting as Required by the NY LLCTA
The NY LLCTA broadly mirrors the CTA, including the types of exempt entities, except in three key areas:
- First, the NY LLCTA is not effective until January 1, 2026. For entities in existence prior to January 1, 2026, the first report is due January 1, 2027. For entities formed after January 1, 2026, the first report is due within 30 days of formation.
- Second, the NY LLCTA applies only to Limited Liability Companies (LLCs), versus the CTA which applies to all forms of entities.
- Third, and perhaps most importantly, an initial report and annual reports thereafter are required under the NY LLCTA even if an entity is exempt from reporting, in order to identify the specific exemption claimed and the basis for the exemption. Therefore, all tax-exempt organizations that have related LLCs should establish plans to ensure that reports required by the NY LLCTA are filed annually.
We recommend that tax-exempt organizations take inventory of all entities they may have formed, even if dormant, to ensure that reports required by the NY LLCTA are filed for all, and consider discussing with legal counsel whether dissolving inactive entities is appropriate. As the New York State Department of State (NYS DOS) is the agency that maintains records of LLCs formed and doing business within the state, and is the agency that will receive these reports, it is reasonable to consider that the NYS DOS may attempt to match records in order to impose substantial penalties on any LLCs formed that did not file.
We are here to help ensure your compliance and protect your business from fraud. If you need further guidance or have any questions regarding BOI filing, please do not hesitate to reach out.
This material has been prepared for general, informational purposes only and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. Should you require any such advice, please contact us directly. The information contained herein does not create, and your review or use of the information does not constitute, an accountant-client relationship.
