In a bid to enhance corporate transparency and combat illegal financial activities, Congress enacted the Corporate Transparency Act (the “CTA”) in 2021. The CTA introduces new reporting requirements for certain U.S. companies, aiming to shed light on beneficial ownership details. The CTA requires these “reporting companies” to file a Beneficial Ownership Information report with the Financial Crimes Enforcement Network before the end of 2024.
How Does the CTA Affect Nonprofits?
Tax-exempt organizations are not required to file Beneficial Ownership Information reports. The reporting requirements under the CTA are not applicable to 501(c) and 527 organizations. Charitable trusts and split-interest trusts described in I.R.C. § 4947(a) are also exempted from reporting. Additionally, subsidiaries, including taxable subsidiaries, of tax-exempt entities, charitable trusts, and split-interest trusts are exempted from the reporting requirements under the CTA.
Tax-exempt organizations already operate in a strict regulatory environment. 1023s are publicly available, and the IRS maintains a public master file of tax-exempt organizations and an online search tool providing detailed information on tax-exempt organizations. Because exempt organizations already disclose much of the information required in a Beneficial Ownership Information report in their 990s and other filings, and such information is publicly available, Congress thought it superfluous to also require exempt organizations to file Beneficial Ownership Information reports.
Which Nonprofits May Need to Comply With the CTA?
Nonprofit organizations that lose their tax-exempt status will have 180 days from revocation by the IRS to file a CTA annual report. In many cases, this deadline will generally come before your nonprofit is able to reinstate its tax-exempt status.
In addition, the CTA does not exempt nonprofits with their tax-exempt applications pending at the IRS. The good news for many organizations awaiting tax-exempt status determination is that if the organization was created prior to January 1, 2024, it has one year to comply with the CTA, and it should receive its tax-exempt status determination (and thus exemption from the CTA reporting requirements) before the end of 2024.
One further wrinkle: Nonprofits organized in 2024 have 90 days from the date of creation to file its initial CTA report. But if the organization does not receive its tax-exempt status before the end of the 90-day filing deadline, the organization may be subject to an initial CTA filing report and continue to be subject to the CTA reporting requirements unless and until it receives tax-exempt status from the IRS.
Conclusion
The CTA marks a significant step forward in promoting transparency within the U.S. business landscape. By requiring reporting companies to disclose beneficial ownership information, the legislation aims to curb illicit financial activities and strengthen the government’s ability to police nefarious conduct. However, because tax-exempt organizations operate in a strict regulatory environment and much of their business information is publicly available, tax-exempt organizations are not bound by the reporting requirements mandated under CTA.
Kyler Mejia is an attorney (bar pending) with Caritas Law Group, P.C. Kyler advises nonprofit and socially responsible businesses on corporate, trademark, tax, and fundraising regulations nationwide as well as donors concerning major gifts. To schedule a consultation, call 602-456-0071 or email us through our contact form.