January 8, 2024

I. Introduction to the Corporate Transparency Act

Faith-based nonprofits may be subject to new reporting requirements under a new disclosure rule.¹  On September 29, 2022, the Financial Crimes Enforcement Network (“FinCEN”) issued a final rule implementing the Corporate Transparency Act’s (“CTA”) beneficial ownership information reporting provisions.² As discussed below, for purposes of the CTA, a nonprofit’s beneficial owners aren’t just “owners” in the colloquial sense. The term includes people of influence over the organization, such as donors, directors, and possibly even staff. The CTA’s purpose is to counter illicit use of the U.S. financial system.  

The law places new reporting requirements on entities that qualify as “reporting companies” under the CTA.³  It is important to determine whether a faith-based nonprofit is subject to the disclosure requirements, especially since the penalties for noncompliance are steep.⁴  Right now, it appears that faith-based nonprofits will be exempt from these requirements as long as they maintain their 501(c)(3) status, but these organizations should be acquainted with this new law and be aware of whether their entities or any related taxable entities will be considered reporting companies under the CTA. Be aware that, if you think the CTA may apply to your organization, there are terms⁵ and due dates⁶ you must understand.  

The CTA reporting rule went into effect January 1, 2024. Any new entities formed during 2024 will have 90 days from formation to make a filing if not exempt.  Entities formed before January 1, 2024 must file by January 1, 2025, if not exempt. Entities formed after December 31, 2024 must file within 30 days after formation.  

Note that legislation is pending that, if passed, would affect several aspects of the Act.  

II. CTA and Nonprofit Organizations – Determining Exempt Status

a. Possible Exemption for Nonprofit Organizations

The CTA exempts various entities from reporting requirements.  When it comes to faith-based nonprofits, two categories will most likely apply—the tax-exempt entities exemption and the subsidiary exemptions.  The reporting exemption for tax-exempt entities applies to organizations that have federal 501(c)(3) tax-exempt status.⁷Nonprofits must remember that the reporting exemption applies only if they remain tax-exempt under 501(c); merely being a nonprofit at the state level is not sufficient to qualify for the exemption, and loss of 501(c)(3) status can result in obligations under the CTA.

The CTA also contains a subsidiary exemption, which applies to any entity whose ownership interests are controlled or wholly owned, directly or indirectly, by an exempt entity.  Thus, if a tax-exempt entity—and therefore an entity exempt from CTA reporting requirements—wholly owns a subsidiary entity, that subsidiary entity will be entirely exempt from reporting, as well.⁸    

Note that the exemption for tax-exempt entities applies to all organizations that are described in 501(c) and exempt from tax under 501(a). This means that organizations should be exempt simply because they qualify as exempt under 501(c)(3). Some organizations have expressed concern that, if a new organization forms and does not receive its IRS determination letter within 90 days of formation, that new organization may be required to file an initial report under the CTA. There is currently nothing in the statute or the regulations to confirm this, but it is an uncertainty worth noting for newly formed nonprofits.

b. Case Study

Imagine you are the sole individual in financial control of a nonprofit organization.  As such, you know that you are considered the “beneficial owner” under the CTA and will need to report information about yourself as beneficial owner if your organization does not qualify for exemption.  In addition to the parent organization, there are three subsidiary entities—one wholly owned by the organization that is used to hold property (“Subsidiary #1”), one joint venture with a different organization that was used to purchase and hold event space (“Subsidiary #2”), and the last, a joint venture with a third-party organization for an after-school program (“Subsidiary #3”).  None of the subsidiaries are structured as 501(c)(3) nonprofit entities.

Your organization fits the description of a 501(c)(3) nonprofit.  Thus, your organization is exempt from filing under the CTA.  You then turn to the subsidiary entities.  Given that Subsidiary #1 is wholly owned by your organization, Subsidiary #1 is also exempt from reporting, even if it is structured as a for-profit entity.⁹ Subsidiary #2 is jointly owned by your parent organization and an organization that is also a 501(c)(3) nonprofit.  Thus, because both organizations that own Subsidiary #2 are exempt, Subsidiary #2 is also exempt from CTA reporting.  Finally, you must analyze your last subsidiary.  Subsidiary #3 is jointly owned by your parent organization and an organization that is not exempt under the CTA.  Therefore, Subsidiary #3 is not exempt, and it must file a beneficial ownership information report.  The report will disclose the ownership interest of the nonprofit parent organization, but need only identify that exempt entity and not give details about individuals at the parent organization.¹⁰

III. Conclusion

Faith-based nonprofits should focus their efforts on ensuring that the CTA requirements do not apply to them, especially by maintaining 501(c)(3) status so they qualify for the exemption for tax-exempt entities.  And if an organization has subsidiaries or joint ventures, that organization should keep careful watch over their subsidiary entities – even those that have been dissolved.  This will help to protect their organizations from potential government targeting and penalties due to accidental noncompliance.  Through careful organization, maintenance of 501(c)(3) status, and tracking of subsidiary entities, faith-based nonprofits can maintain their operations without running afoul of the CTA reporting requirements.  

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¹ Beneficial Ownership Information Reporting Requirements, 87 Fed. Reg. 59498 (Sept. 30, 2022).

² Beneficial Ownership Information Reporting Rule Fact Sheet (September 29, 2022), https://www.fincen.gov/beneficial-ownership-information-reporting-rule-fact-sheet.

³Id.

⁴Id.

⁵ To better understand the reporting requirements imposed by the CTA, it is crucial to understand the terminology.  Companies subject to the CTA reporting requirements are called “Reporting Companies,” and include any entity created by the filing of a document with a secretary of state or similar office.  Reporting Companies will be required to disclose their beneficial ownership and company applicant information.  A “Beneficial Owner” includes any individual who, directly or indirectly, either (1) exercises control over a Reporting Company, or (2) owns or controls at least 25 percent of the ownership interests of a Reporting Company.  A “Company Applicant” is essentially any individual who directly files the document that creates the entity, or registers a foreign reporting company to do business in the U.S.  Additionally, a Company Applicant can be the individual who is primarily responsible for directing or controlling the filing of the relevant document by another person.  

Finally, a Reporting Company must be prepared to file the required disclosures in a “Beneficial Ownership Information” (“BOI”) report.  In a BOI report, a Reporting Company must identify itself and report information about each of its Beneficial Owners, including name, birthdate, address, and a unique identification number and issuing jurisdiction from an acceptable identification document, including the image of such document.  To make compliance easier, an individual can obtain a FinCEN identifier number, which can then be provided on a BOI report in lieu of the required information.  BOI reports are filed with FinCEN and will be made available to other law enforcement agencies—including state, local, and non-U.S. law enforcement agencies—but are not intended to be publicly available.

⁶ There are several important dates regarding CTA reporting requirements. Beneficial Ownership Information Reporting Requirements, 87 Fed. Reg. 59591 (Sept. 30, 2022) 59591. The first of these dates is January 1, 2024.  All domestic reporting companies and foreign reporting companies formed or registered during 2024 must file an initial report within ninety calendar days of the date on which the reporting company receives actual notice that its creation or registration has become effective, or the date on which a secretary of state or similar office first provides public notice.  For companies formed after December 31, 2024, the deadline is shortened to 30 days. Another critical date is January 1, 2025.  Any domestic reporting company created before January 1, 2024 and any entity that became a foreign reporting company before January 1, 2025 will be required to file a report not later than January 1, 2025.

⁷ The CTA exempts from its requirements all entities that: (1) are described in Section 501(c) of the Internal Revenue Code of 1986 (“IRC”) and exempt from tax under Section 501(a) of the IRC; (2) are political organizations as defined in Section 527(e)(1) of the IRC and exempt from tax under section 527(a) of the IRC; or (3) are trusts as described in paragraph (1) or (2) of Section 4947(a) of the IRC. Beneficial Ownership Information Reporting Requirements, 87 Fed. Reg. 59591 (Sept. 30, 2022) 59594.

⁸ However, if an entity exempt from reporting enters into a joint venture with a non-exempt entity, that subsidiary entity will not be exempt from reporting.  Therefore, even exempt entities will need to be cautious of the organizations in which they form joint ventures with.

⁹ N.B.  This structure is used to concentrate activities which produce “unrelated business income” in a taxable, for-profit subsidiary.  Such entities are sometimes called “blockers.”

¹⁰ 31 C.F.R. § 1010.380(b)(2)(i).