The Corporate Transparency Act's Impact On Charities and Tax-Exempt Entities

The Corporate Transparency Act (the “CTA”) became effective Jan. 1, 2024. The CTA’s goal is to reduce money laundering and other financial crimes by requiring the reporting of ownership and control information of businesses operating in the United States. Following is a summary of the impact of the CTA on charities and tax-exempt entities.

CTA Non-Profit Exemption for 501(c) Tax-Exempt Entities and Charitable Trusts

Non-profits are exempt from CTA beneficial ownership information reporting requirements. This exclusion applies to all Section 501(c) tax-exempt entities and charitable trusts. All Section 501(c) tax-exempt entities and charitable trusts formed before Dec. 31, 2023, fall under this exemption and do not have to file under the CTA. If a charity loses its tax-exempt status with the IRS, it has a 180-day grace period during which it is still exempt from CTA filing requirements. If it regains its tax-exempt status in that 180-day period, it will remain CTA-exempt. However, if it does not regain its tax-exempt status in that 180-day grace period, the entity has 30 days to file its beneficial ownership information report.

CTA Subsidiary Exemption for Formed Entities of 501(c) Tax-Exempt Entities and Charitable Trusts

Entities formed by a non-profit are likely CTA-exempt as well. A single-member LLC or other entity that is controlled or wholly owned, either directly or indirectly, by one or more charities or tax-exempt entities is exempt from the CTA reporting requirement. This subsidiary exemption applies to both for-profit and non-profit entities owned solely by one or more charities or tax-exempt organizations.

However, reporting is required if the charity or tax-exempt entity is not the sole owner of a business entity (for example, if the charity owns 50% while the other 50% is owned by private, non-CTA-exempt individual or entities). In these instances, the entity (not the charity or tax-exempt entity) will have to file a beneficial ownership information report since the subsidiary is not controlled or owned entirely by CTA-exempt individuals. In this case, the entity will have to report the name of the charity or tax-exempt entity as an owner on its beneficial ownership information report. Please note that the names of the individual directors/members/shareholders of the charity or tax-exempt entity need not be reported.

CTA Reporting Requirements for Newly Formed 501(c) Tax-Exempt Entities and Charitable Trusts

The CTA requires all entities formed after Jan. 1, 2024, to file their initial CTA beneficial ownership information report within 90 days unless the entity is CTA-exempt. An entity becomes a 501(c) tax-exempt entity, and thus a CTA-exempt entity, once the IRS approves its Form 1023 application. Therefore, a newly formed entity with Form 1023 pending is not yet a 501(c) entity; since this newly formed entity is not yet a 501(c) entity, it is not CTA exempt. Therefore, until the Form 1023 application is approved and the entity receives its determination letter from the IRS, the entity is not CTA exempt. Because it is unlikely a Form 1023 application will be approved by the IRS within 90 days of the entity’s formation, most newly formed charities or tax-exempt entities will have to file a CTA report. Once the entity receives its determination letter from the IRS approving its tax-exempt status, it would automatically fall under the non-profit exemption of the CTA, and any ongoing reporting obligations would cease.

The CTA requires a report on any person who, either directly or indirectly, 1) owns or controls more than 25% of the equity interest in the entity, or 2) exercises substantial control over the entity. Because there are no owners of a non-profit or charity, there would be nothing to report for #1. However, individuals are exercising substantial control over the non-profit, the directors.

Any member of the charity or tax-exempt entity’s board of directors have “substantial control” for the purposes of the CTA. Substantial control is defined as (A) serving as a senior officer of the reporting company, (B) having authority over the appointment or removal of any senior officer or a majority of the board of directors (or similar body), or (C) directing, determining, or having substantial influence over important decisions made by the reporting company. Further, 31 C.F.R § 1010.380(d)(1)(ii) states an individual may exercise substantial control through board representation. Therefore, the CTA beneficial ownership information report would likely have to list the directors of the charity or tax-exempt entity and anyone else exercising substantial control over the non-profit.

Once the entity obtains its determination letter qualifying it as a charity or tax-exempt entity, it should file an updated beneficial owner report indicating that the entity is now exempt from CTA reporting. Please note that the entity may again be subject to CTA reporting if it subsequently loses its exempt status. See the second paragraph of this article above.

Summation

Charities and tax-exempt entities are exempt from CTA reporting requirements. Charities and tax-exempt entities formed after Jan. 1, 2024, must file an initial CTA beneficial ownership information report within 90 days of its formation. Once the entity receives its determination letter from the IRS approving its tax-exempt status, any ongoing CTA reporting obligations will cease. An entity not owned entirely by one or more charities and tax-exempt entities must report the charity and/or tax-exempt entity as a beneficial owner but will not report the names of individual directors/members/shareholders of the charity or tax-exempt entity.

For additional information, please contact Robin Ferriby (rferriby@clarkhill.com) or Joseph McCarthy (jmccarthy@clarkhill.com).

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