The Corporate Transparency Act (CTA) has been declared unconstitutional by an Alabama court, putting the newly finalized law in jeopardy. Beneficial Ownership Information (BOI) reporting requirements directing closely held businesses to submit personal details about the beneficial owners to the Financial Crimes Enforcement Network (FinCEN) are now in limbo as the government prepares its response to the ruling.
Court Rules CTA ‘Unconstitutional’
The National Small Business Association (NSBA) filed a suit on November 15, 2023 arguing that the CTA exceeded the constitutional powers of Congress and infringed upon the rights of Americans by requiring them to provide personal information to a law enforcement database. The Northern District of Alabama court sided with the NSBA, writing in conclusion, “The Corporate Transparency Act is unconstitutional because it cannot be justified as an exercise of Congress’s enumerated powers.”
Thomas Lee, special counsel representing the NSBA, said of the ruling, “In our view, Judge Burke correctly ruled that, while well-intentioned, the CTA exceeds the powers given to Congress by the Constitution. This was a high-stakes Constitutional litigation involving an unprecedented federal statute with broad potential impact.”
Who is Impacted by the Court Decision?
According to a statement from FinCEN following the court case, the bureau has agreed to comply with the ruling, adding, “the government is not currently enforcing the Corporate Transparency Act against the plaintiffs in that action: Isaac Winkles, reporting companies for which Isaac Winkles is the beneficial owner or applicant, the National Small Business Association, and members of the National Small Business Association (as of March 1, 2024). Those individuals and entities are not required to report beneficial ownership information to FinCEN at this time.” With this interpretation, it appears that FinCEN still expects businesses that aren’t members of the NSBA to continue compiling and submitting BOI reports.
What are BOI Reporting Requirements?
BOI reporting requirements for newly formed entities were due to start on January 1, 2024, while existing entities formed before 2024 were required to complete their first BOI filings by January 1, 2025. Businesses would have been required to provide information about individuals who directly or indirectly own or control at least 25% of a company, including details like:
- Full legal name
- Date of birth
- Current address
- Unique identifying number from an acceptable identification document
- An image of their government-issued photo ID from which the identifying number was provided
What are Next Steps for Businesses?
While the CTA may be revised in response to the successful suit, the government is still able to appeal the ruling. Regardless, the law has paused for now which may impact some businesses that have already begun work with financial advisors or service companies to prepare BOI reports. You may be able to pause or cancel a contract you have signed with them, but because it’s still possible that the law will resume following an appeal, it may make more sense for your company to wait out the government’s response.
Take this time to review your entity arrangements and all legal documents for each entity. Is each document current or is new documentation necessary? These may be questions you can discuss with your advisors, taking advantage of this unexpected respite to gather information and make necessary changes to put your business in a better position.
Anders Tax advisors closely follow tax law changes and evolving guidance and will continue to publish insights to keep you informed.
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