From January 1, 2024, the Corporate Transparency Act (CTA) will bring substantial changes to the corporate landscape in the United States, particularly affecting entities like Solo 401k and Checkbook IRA plans.
This pivotal legislation requires comprehensive reporting of beneficial owners to the Financial Crimes Enforcement Network (FinCEN), a significant shift towards enhanced transparency and accountability. Our focus here is to dissect the CTA’s nuances and its implications on Solo 401k and Checkbook IRA retirement plans.
The Purpose of the Corporate Transparency Act
The primary objective of the Corporate Transparency Act is to combat money laundering and other criminal activities by increasing transparency surrounding the ownership and control of entities operating in the United States.
The U.S. Treasury aims to collect more detailed information about individuals who hold significant control or ownership stakes (at least 25%) in U.S. entities. This initiative aligns with a broader trend in which government agencies, including the IRS, seek greater disclosure of individual ownership, both in cryptocurrency and U.S.-focused entities.
The U.S. government believes that there is substantial under-reporting of income taxes and potentially criminal activities by some entities that have managed to remain hidden. The CTA is expected to bridge this information gap by mandating the reporting of beneficial ownership information (BOI) to FinCEN.
Effective Date of the Corporate Transparency Act
The CTA becomes effective on January 1, 2024. It necessitates most U.S. domestic and non-U.S. entities doing business in the United States to disclose specific information about their beneficial owners and controllers to FinCEN.
These rules will have implications for investment funds and Self-Directed IRA LLCs, as they will be required to report beneficial ownership information for certain individual owners and control persons.
Impact on Entities
The CTA’s impact on entities is substantial, with an estimated 32.6 million entities subject to BOI reporting requirements in its initial year. In the following years, it is anticipated that nearly 5 million initial BOI reports will be filed annually. Additionally, about 6.6 million BOI update reports are expected to be filed in 2024, and approximately 14.5 million such reports annually for subsequent years.
One key challenge for FinCEN is handling the sheer volume of reports with their limited manpower. As of 2023, they have less than four hundred employees, raising questions about their capacity to utilize the data collected effectively.
Entities That Must File BOI Reports
The Corporate Transparency Act mandates that all entities formed or registered to conduct business in the United States must either qualify for an exemption from the reporting requirements or submit a BOI report to FinCEN.
Exemptions to the CTA BOI Requirement
Certain exemptions exist under the CTA, including:
- Entities already subject to other federal reporting, such as registered investment advisers under the Investment Advisers Act of 1940.
- Large operating companies meeting specific criteria, including having at least 20 full-time employees, a physical U.S. office, and gross receipts exceeding $5 million.
- Tax-exempt entities like private foundations.
- Certain inactive entities: if your entity was established before 1/1/2020, and has *not* had *any* activity in the last 12 months and transactions less than $1000 in the last 12 months
- Certain types of trusts not created through a filing with a Secretary of State or similar office.
- Solo 401k plans are exempt because they are retirement trusts and are not formed or registered to conduct business in the U.S.
Defining Beneficial Owners
The CTA defines a “Beneficial Owner” as an individual who:
- Exercises substantial control over the reporting company or can appoint a senior officer.
- Owns or controls at least 25% of the ownership interests in the reporting company.
Importantly, a “Beneficial Owner” must be a person, not a company or legal entity.
BOI Reporting Deadlines
For LLCs, the reporting deadlines are as follows:
- LLCs established on or after January 1, 2024, must report BOI information to FinCEN within 90 days of creation.
- LLCs established before January 1, 2024, must submit BOI reports on or before December 31, 2024.
Penalties for Non-Compliance
While BOI reporting is free, failure to file or late submission can result in penalties of $500 per day, up to a maximum of $10,000. Additionally, criminal penalties of up to two years of imprisonment may apply for non-compliance with the BOI reporting requirement.
BOI Report Information
Reporting companies are required to provide the following information in the BOI report:
- Legal name of the individual.
- Date of birth.
- Current address.
- Identifying number (e.g., passport, driver’s license, state ID) of the individual.
Any changes to the BOI must be reported to FinCEN within 30 days of the change, and corrections must occur within 30 days of discovering an error.
Impact on Self-Directed IRA LLCs
A Self-Directed IRA LLC, also known as a Checkbook Control IRA, will be considered a reporting company under the CTA. Thus, it will be required to submit a BOI report to FinCEN. Since the report must be filed by an individual and not an entity, the information of the IRA owner, who controls the LLC as the manager, must be included in the report.
To ease this process for clients, some companies, like Nabers Group, have developed programs to help clients file BOI reports, as each report must be submitted directly to FinCEN by a person with a FinCEN filing number.
Exemptions for Self-Directed IRAs and Solo 401k Plans
Full-service Self-Directed IRAs and Solo 401k plans that invest directly without using an LLC are exempt from the CTA’s reporting requirements, as they are not categorized as entities formed to conduct business in the United States.
As the Corporate Transparency Act comes into effect in 2024, it will introduce additional reporting obligations for any entity business owner (e.g. LLC, Limited Partnership, Corporations, etc) as well as those using the Checkbook IRA LLC structure. While this may raise concerns for some investors, it’s important to note that compliance services are available to assist with the reporting process.
The CTA represents the government’s efforts to identify and address illicit activities, ensuring a more transparent business environment. Stay tuned as we witness the implications of this legislation unfold in the coming year.
For further details and official documentation on the Corporate Transparency Act, you can refer to the Financial Crimes Enforcement Network’s website here.
Frequently Asked Questions
How does the CTA impact Solo 401k plans?
Solo 401k plans, being retirement trusts and not formed for business operations, are generally exempt from the CTA’s BOI reporting requirements.
What is the deadline for entities established before 2024 to comply with CTA?
Entities established before January 1, 2024, must file their BOI report by December 31, 2024.
What penalties exist for failing to comply with the CTA?
Non-compliance can result in fines up to $10,000 and/or imprisonment.