Client Alert: How Does the Corporate Transparency Act Affect Nonprofit Organizations?
Date: November 14, 2024
By:
Kellie L. Newton
In 2021, Congress passed the Corporate Transparency Act (“CTA”), creating a beneficial ownership information reporting requirement for corporations. The CTA is largely intended to create more transparency around smaller private companies, which previously had fewer disclosure requirements than publicly traded companies. The CTA requires corporate entities to disclose all beneficial owners to the Financial Crimes Enforcement Network (“FinCEN”), a bureau within the Treasury Department. The CTA is in effect, despite ongoing litigation over the law.
Corporations formed prior to 2024, that fall under the CTA criteria, must file their disclosures by January 1, 2025. Failure to comply with the CTA can result in civil fines, ranging from $500 to $10,000 per day.
For more general information on the CTA: Whiteford, Taylor & Preston LLP | Corporate Transparency Act Guidelines & Whiteford, Taylor & Preston LLP | Client Alert: Corporate Transparency Act Update: FinCEN Reporting and Compliance Begins in 2024
What does it mean for nonprofit organizations?
The CTA includes a list of 23 types of entities that are exempt from the beneficial ownership reporting requirement. One of these exemptions covers tax-exempt entities. Section 11(xix) of the Act defines tax-exempt entities as:
A) An organization that is described in section 501(c) of the Internal Revenue Code of 1986 (Code) (determined without regard to section 508(a) of the Code) and exempt from tax under section 501(a) of the Code, except that in the case of any such organization that ceases to be described in section 501(c) and exempt from tax under section 501(a), such organization shall be considered to continue to be described in this paragraph (c)(1)(xix)(A) for the 180-day period beginning on the date of the loss of such tax-exempt status;
(B) A political organization, as defined in section 527(e)(1) of the Code, that is exempt from tax under section 527(a) of the Code; or
(C) A trust described in paragraph (1) or (2) of section 4947(a) of the Code.
(B) A political organization, as defined in section 527(e)(1) of the Code, that is exempt from tax under section 527(a) of the Code; or
(C) A trust described in paragraph (1) or (2) of section 4947(a) of the Code.
This exemption includes 501(c)(3), 501(c)(4), 501(c)(6), and 527 entities that are properly operating as tax-exempt organizations within the IRS’ requirements. This includes organizations that have IRS determination letters and other 501(c) organizations that have taken the steps necessary to be considered tax-exempt according to the IRS, including those that are rightfully self-declared.
There is, however, some ambiguity over whether this exemption covers entities that operate as nonprofits but have not yet filed either a Form 1023, Form 1024, or Form 8976 or have their applications for tax exemption pending. The statute does not explicitly require nonprofits to have IRS acknowledgment to be included in this exemption, leading many commentators to believe that IRS tax-exempt status is not necessary to take advantage of the tax-exempt exception to reporting under the CTA. Still, some entities that fall within this gray area may choose the more cautious approach of reporting to FinCEN. The Treasury Department, in its rulemaking, acknowledged arguments for the exemption for tax-exempt entities to be read more broadly and stated that FinCEN would assess the need for further guidance.
There is also an exemption for entities whose ownership interests are controlled or wholly owned, directly or indirectly, by a tax-exempt entity described in Exemption Section 11(xix). This covers subsidiary entities of nonprofit organizations.
For more information on how the CTA affects nonprofit and tax-exempt organizations, please reach out to Kellie Newton.
*Senior Law Clerk, 2024
The information contained here is not intended to provide legal advice or opinion and should not be acted upon without consulting an attorney. Counsel should not be selected based on advertising materials, and we recommend that you conduct further investigation when seeking legal representation.