Tax Tips

2024 Version


Hey good afternoon Allen Lizza, CPA and welcome to a 2024 edition of Tax Tip Tuesday, we’re going to speak about something very important today outside of the normal tax realm, and that is the beneficial ownership information reporting. It’s a brand new federal requirement out of bureau called FinCEN, which is Financial Crimes Network, Financial Crimes Enforcement Network. It’s a part of the US Treasury Department, our friends at the IRS.

this basically is an excerpt from the BOI information manual. In 2021, Congress enacted the Corporate Transparency Act. This law creates a beneficial ownership information reporting requirement as part of the US government’s efforts to make it harder for bad actors to hide or benefit from their ill gotten gains through shell companies and other opaque ownership structures. Sounds like something straight out of Gotham City.

But FinCEN is here, and so I have a list. Basically, the FinCEN guide is very, very useful with regards to, you know, what kind of entities have to file. When you have to file, there’s a plethora of information on the FinCEN website which you see right here. there’s a lot of questions with regards to who’s required to file these reports, when they’re required to file it, who should be filing it for an individual entity if they are a required reporting entity.

So I’m going to try to answer some of those questions today. You know, quite honestly, FinCEN has put a lot of information out there on their website. as well as providing information and business communities and networking. But to me it’s, it’s a very obviously today on February 9th that even though this has been in place since the first of the year, that there are numerous professionals as well as thousands of business owners that are unaware of what the BOI reporting process is.

So we’re going to explore that today. I would encourage you to go out to the FinCEN website and do the research. This is a required reporting. We’ll talk more about how it’s done later, but I wanted to go through some of the rudimentary topics and sort of summarize some of the key issues that are noted in the guide.

First off is does my company have to report is beneficial owners? That’s chapter one of the guide. And basically any company or entity that registers with the Secretary of State in Texas or another state entity is more than likely going to be required. There are some exceptions, but any single member LLC is Mom and Pop Operations LLC, whether S-Corps partnership C-Corps.

You know, there are numerous entities that just by registering with the Secretary of State, you know you are going to be required to file three key areas in this whole reporting process is going to be a reporting company, beneficial owners and company affiliates and applicants. I save the company applicants for last because that’s probably something that’s not going to apply to many people, at least if you have an LLC in place or entity in place before 2024.

We’ll get to some of the exemptions in just a second. There are basically 23 different types of entities are exempt from filing, but quite honestly, the bulk of my clientele and the clientele of a lot of CPA firms are going to be required to file a tax exempt entity, for instance, is not required to file, but that is tax exempt. With the federal government not tax exempt as a state level for franchise tax or sales tax.

So we’re talking about 501 CS 527 4947 code section type of entities that would be considered tax exempt from a federal standpoint, large operating companies basically that then any entity that has greater than 20 full time employees is stationed in the US and has greater than $5 million in gross receipts. There are key six key points, but those are three of the major points that are going to delineate whether you will fall under the large operating company exception.

another area is the inactive entity. And this is very interesting because if you meet all six requirements, then you’re considered as an inactive entity. You would not be required to file the FinCEN BOI report. That would be you existed prior to one one 2020 for whatever reason that may be. You’re currently not active. Basically, you’ve had no change in ownership and your receipts any receipts transfer of funds are less than $1,000 in the last 12 months and you have no other assets.

If you meet those criteria, you’re not required to file. If you are inactive and then become active, that’s going to be something that will probably require you to file. We’ll talk about changes in information requiring that process. who is a beneficial owner of my company is item number two of the six topics that we’re going to look at.

Basically a beneficial owner is anyone who has 25% greater interest in the company or exercises a substantial control and a substantial control feature, something that a lot of people are going to have to dig into in this FinCEN website because there are a lot of nuances with that with regards to who has substantial control or not. Basically, FinCEN looks at every reporting company will have some form of substantial control and at least one as a result, at least one beneficial owner to report on the FinCEN

BOI, take, for instance, a homeowner’s association. The homeowners association is an entity that establishes itself with the secretary of state. Thus they’re required to file. They’re going to be active, they’re going to be required to file, but typically they’re not going to have a beneficial owner in the sense of anybody having shares or profit or capital interest, but they will have somebody that is going to meet that substantial ownership interest through the performance of duties that they have.

And as such, an HOA would be required entity to file. Once again, a lot of the nuances with regard to substantial ownership are on the FinCEN website, you know, in the user guide, and it goes a lot deeper than that, especially when you’re talking about multi-tiered entities. So it’s something to really look at of your in that case, you know, ownership interest is going to be anything, like I said, capital or profit interest, equity stock, voting rights, convertible instruments, like I said, a plethora of nuances that could substantiate ownership or required reporting.

There are some exceptions, exceptions to a beneficial ownership definition. And once again, this is also on a guide. A minor child, for instance, would be an exception. However, that minor child reaches a majority in later year. That might create a need to update the reporting, custodial or agent and employee who, just by being an employee has supervisory skills, would not be substantial control like an officer would inheritor or a creditor.

And those are all exceptions. And like I said, substantial control is going to be senior officers, you know, decision makers, key personnel. And once again, you know, that’s something that needs to be looked at if substantial control is going to be the main issue to determine whether you are going to be required to report or not. Does my company have to report its company applicants.

This is the third topic. This will not come into play for a lot of folks. If you basically have had your entity established prior to 1-1-2024, you’re not going to be reporting company applicants after 2024 January 1st and you set up a new entity, then yes, those company applicants would have to be disclosed in the initial report and a company applicant is going to basically be, you know, one of two people, someone who has a direct involvement or a direct filer in the formation of the LLC or somebody who is assisting in that process.

But as I mentioned, for any entity prior to and, you know, and established prior to 1-1-2024, that information is not going to be disclosed or required to be disclosed. And actually, if you go to the FinCEN website when you’re filing this report online, which is a required methodology and you check the box that you were in existence, it’ll grey out all the information so you can’t even enter a company applicant.

So that’s a little bit of good news. What specific information does my company need to report? If you’re a reporting entity, you’re going to report Firstly, the reporting company information, which is a full legal name, current address, and you want to make sure this information is complete because there are penalties if you change information and don’t report it in a timely manner, complete address, you’re going to have the EIN of the entity, and that’s really it.

This is an informational database. It’s not reporting financial information. And on that note, it is not it is not public record for each beneficial owner, which would be the ownership 25% or more, or the substantial control people, a full legal name, date of birth, no Social Security, complete address. And then you’re going to have a unique reporting number.

Whether that is going to be a Texas driver’s license in the state of Texas, a passport, no Social Security information. That information you will list on a website. And then you’re going to have to upload a clear document that reflects that, let’s say, a Texas driver’s license front and back that can be in a PDF, a JPEG or a PNG file.

That’s not a difficult process, but for every beneficial owner, you’re going to have to report that information and then to submit our information with regards to who is submitting the report, when and how should my company file its initial report. This is very important. If you are in existence as of 1-1-2024, you basically have a year until December 31st.

You know, this is a new process. The rules have changed. There was a lot of concern about this, but you have a year to do this. If you don’t do it, the penalties are $500 a day and there can be civil and criminal penalties with up to two years in prison and a $10,000 fine. So this is not like being tardy on filing your tax return.

You know, this could be, you know, have some serious effects. More importantly, if there are any changes that you make, whether, as I mentioned, a minor now becomes the age of majority, that information and address change ownership changes things of those nature have to be updated within 90 days. The rules are going to change a little bit in 2025.

But for 2024, if you have some changes, they need to be updated within 30 days to once again avoid some of those problems. What if there are changes to the or inaccuracies in your report, you can always go back into the system and update it the by testing it myself. It’s not a difficult process, I think. And more importantly, if you spend a few minutes on the guide and understand what the process is going in and actually completing it on the FinCEN website, having that document ready to upload, it’s a very simple process.

It might take all 20 minutes. I just can’t stress enough that as as much information is out there, I come across people every day that don’t know a thing about this, both in a professional ranks as well as clients. And like I said, for any entity, typically this is going to be a required one time reporting unless there is changes whose responsibility it is.

This, again, it’s not the CPAs. This is outside the tax realm, although you can have a CPA help you, but you need to broach that topic with your CPA. Some firms are not being allowed to do so by their insurer. Insurance carriers won’t cover them under malpractice. I think it’s a little bit ridiculous, but that’s something that you need to to discuss with your tax preparer

A lot of tax preparers are talking about kicking it to the attorney. Well, many LLCs that get set up utilize maybe an attorney or a third source to set up their LLC and they’ll never see or deal with them again. So it’s something that you should you should really look into. I can’t stress the importance of it is a required filing.

The FinCEN website has a plethora of information on it. Go out there and explore, talk to your CPA or tax practitioner, reach out, find someone to help you or do it yourself, but get it done in 2024. Thanks. Have a great day. Allen Lizza CPA.