The Corporate Transparency Act came into effect on January 1, 2024, requiring an estimated 32.6 million entities to comply with the new BOI report. While the report isn’t related to taxes, it is a hot topic for small business owners across the country this year. As you interact with your small business clients this tax season, you can expect to receive some questions on the BOI report. Here’s a breakdown of the basics to help you stay informed and answer your client’s questions:
What is a beneficial owner?
Before we dive into the new BOI report, it’s helpful to have a strong understanding of what a beneficial owner is. Beneficial owners are owners of companies, investments, property, or other assets whose names do not appear on the official title of that asset. This is usually for the owners’ convenience, safety, or privacy. For example, prominent figures often protect the privacy of their home address by keeping their name off of the property title. In the stock market, most investors are beneficial owners (with the names of their brokerage firms appearing on the actual titles) since transferring their stock investments to their own name would require extra paperwork and inconvenience.
Of course, the Corporate Transparency Act is concerned with businesses, and it defines a beneficial owner as anyone who has a 25% or greater stake in the company or anyone who has “substantial control” over the company such as “senior officers” and “important decision makers.”
What is the Beneficial Ownership Information (BOI) report?
In the simplest terms, the BOI report is how businesses will provide the personal identifying information of their beneficial owners to the Financial Crimes Enforcement Network (FinCEN). While many small business owners report feeling unprepared to file a BOI, FinCEN expects that most reporting companies can complete their BOI reports themselves using the information provided on the FinCEN website.
For each beneficial owner as defined above, the company must report their name, date of birth, address, an identifying number from an acceptable form of ID such as a passport or driver’s license, and an image of the ID.
Why is BOI reporting required?
The new BOI report is an effort to fight against tax evasion or fraud, money laundering, and other unethical and illegal financial practices. Individuals who engage in these practices often use small businesses or shell companies to do so, keeping their names off the books and making it easier to avoid being caught.
The BOI report makes it far more difficult to hide as it requires these companies to report the personal information of each beneficial owner.
Who must file a Beneficial Ownership Information report?
FinCEN lists two types of “reporting companies” (companies required to file a BOI Report). There are two types of reporting companies:
- “Domestic reporting companies are corporations, limited liability companies, and any other entities created by the filing of a document with a secretary of state or any similar office in the United States.
- Foreign reporting companies are entities (including corporations and limited liability companies) formed under the law of a foreign country that have registered to do business in the United States by the filing of a document with a secretary of state or any similar office.”
These broad categories are meant to cover virtually any company operating in the United States, though many companies that are already heavily regulated will be exempt from reporting requirements.
Who is exempt from BOI reporting?
There are 23 types of entities exempt from the BOI report, most of which are already regulated and, therefore, already supply the required information on their beneficial owners in other documents. Examples include banks, credit unions, insurance companies, accounting firms, and large operating companies (defined as having more than 20 employees, a physical office in the U.S., and more than $5 million in gross receipts and sales in the previous year). Thus, it’s mostly small businesses that are subject to the BOI report.
Do nonprofits have to file a BOI report?
Nonprofit organizations are not automatically exempt from the BOI report, and most will need to file one. Like any other company, if a non-profit qualifies for one of the 23 exemptions, it won’t have to file a BOI. Notably, tax-exempt entities are one of the exemptions, so tax-exempt nonprofits such as religious institutions will not have to file a BOI.
What is the Financial Crimes Enforcement Network (FinCEN)?
FinCEN is a bureau of the U.S. Department of the Treasury, created to combat financial crimes such as money laundering and terrorist financing. FinCEN collects and analyzes information about financial transactions to help law enforcement and regulatory agencies detect and prevent illicit activities. Financial institutions, such as banks and money service businesses, are required to file various reports with FinCEN on certain transactions and activities that may be indicative of financial crimes.
Final thoughts on the BOI report & your role as a tax preparer
The BOI report is new and likely to be a point of confusion for many small business owners. Some of your clients may come to you with questions or even incorrectly assume that the BOI is a part of their tax filing requirements. By learning about the BOI report, you can field your clients’ questions and direct them to the proper resources on the FinCEN’s website.
Keep in mind that many small business owners still have not heard of the BOI report. Consider including the basic information in your next newsletter or mentioning it to your small business clients as you see them this tax season. By making them aware, you could them avoid costly penalties and bolster your professional relationship.
