BOI Reporting Deemed Unconstitutional for Some
On January 1, 2024, the Corporate Transparency Act (CTA) went into effect. The CTA requires most smaller corporations, most limited liability companies, and some other business entities to file a beneficial ownership information (BOI) report with the U.S. Department of the Treasury Financial Crimes Enforcement Network (FinCEN).
The BOI report identifies and provides contact information for the human beings who own or control the entity. FinCEN will share this information with law enforcement to combat money laundering and other illegal activities.
About 32 million existing and most new businesses are subject to this filing requirement. Since the first of the year, about 500,000 BOI reports have been filed online at the FinCEN website.
But on March 1, 2024, a federal district court (federal trial court) in Alabama ruled that the Corporate Transparency Act was unconstitutional. In National Small Business United v. Yellen, No. 5:22-cv-01448 (N.D. Ala. 2024), the court issued an injunction staying enforcement of the CTA against the two plaintiffs in the case: a single individual business owner and the National Small Business Association—a 65,000-member nonprofit organization of small business owners.
The district court ruling created some uncertainty among businesses subject to the CTA (termed “reporting companies”). Here’s what you need to know:
- If you were not a member of the National Small Business Association as of March 1, 2024, this decision has no immediate impact on you. FinCEN still expects all reporting companies to comply.
- As expected, the Justice Department, on behalf of the Department of the Treasury, filed a notice of appeal on March 11, 2024. In other words, this trial court decision is far from the final word on the CTA’s constitutionality.
- No one can predict how the courts will ultimately rule, but many legal experts believe there are strong legal grounds to reverse the trial court’s decision.
- If your reporting company existed before 2024, you have until January 1, 2025, to comply with your BOI filing requirement. So you can wait until late 2024 to see what happens with the pending litigation.
- If your reporting company was formed during 2024, you have only 90 days after your articles of incorporation, articles of organization, or similar documents were filed with the secretary of state to file your BOI report. You can’t afford to wait.
Meanwhile, New York adopted its own BOI reporting law that applies only to limited liability companies formed in New York or formed out of state that register to do business in New York. Existing LLCs must file their reports with the New York Department of State by January 1, 2025. Newly formed LLCs will file their reports when they file their articles or registrations. Other states, such as California, are considering enacting similar laws.
Tax Reform Doubles Down on S Corporation Reasonable Compensation
From 2018 to 2025, the Tax Cuts and Jobs Act is offering a 20 percent deduction on pass-through business income, with specific eligibility criteria. This deduction impacts the choice of entity. For instance, should you operate as a sole proprietorship or an S corporation?
The Importance of Reasonable Compensation
When operating your business as an S corporation, you must pay yourself “reasonable compensation.” Failing to do so can result in penalties, increased taxes, and missed deductions.
Balancing Act for S Corporation Owners
Lowering salary. While reducing your salary might seem attractive to increase pass-through income and the Section 199A deduction, it risks IRS penalties and reduced benefits.
Increasing salary. Conversely, a higher salary increases payroll taxes and potentially reduces your Section 199A deduction.
Unique Situation: Zero Salary
In rare cases, you might not need the S corporation to pay you a salary (e.g., you do not actively provide services to your S corporation). This setup can maximize your pass-through income and Section 199A deduction, but it requires careful planning to ensure legality.
S Corporation versus Sole Proprietorship
Choosing between an S corporation and a sole proprietorship is a nuanced decision, impacted by the Section 199A deduction, payroll taxes, and reasonable compensation requirements. While S corporations can offer Social Security and Medicare tax savings, sole proprietorships benefit from a more straightforward tax structure and potentially higher Section 199A deductions under certain conditions.
Navigating the Evolving Landscape of Corporate Transparency and Tax Regulations
As we look towards the future of corporate transparency and tax reform, businesses must stay agile and informed. The CPA’s role becomes crucial as the recent court ruling against the Corporate Transparency Act (CTA) introduces significant uncertainty, especially for small business owners. It is essential for companies to closely monitor the progression of this litigation, with CPAs providing the necessary guidance on compliance and potential financial implications. Despite the current legal challenges, compliance remains paramount, and the CPA’s expertise in meeting BOI reporting requirements cannot be understated.
Furthermore, the ongoing adjustments in tax regulations, such as those related to the S Corporation and pass-through income deductions, require businesses to reevaluate their structures and compensation strategies. CPAs play a vital role in balancing the optimization of tax benefits with adherence to legal standards, necessitating strategic planning and professional advice. As we navigate these complex landscapes, the proactive involvement of a CPA will be crucial. Businesses are encouraged to consult with CPAs to ensure compliance and optimize their operational strategies in this rapidly changing regulatory environment. This proactive approach will not only ensure legal compliance but also position businesses for sustainable growth and stability in an unpredictable market, with CPAs leading the way in strategic financial planning and analysis.
