The Corporate Transparency Act (CTA), a new federal financial reporting law that will take effect on Jan. 1, 2024, is a hot topic in the corporate world these days. However, nonprofits also need to be aware of the law, which may apply to them under certain circumstances.

What is the CTA?

The CTA will require millions of entities to begin filing annual reports with the federal Financial Crimes Enforcement Network (FinCEN). Entities will be required to provide basic entity information, as well as a list of its “beneficial owners” and, in some instances, its incorporators. “Beneficial owners” are defined by the CTA as individuals who own more than 25% of the entity or otherwise exercise substantial control over the entity. The law aims to combat illicit activities carried out through shell entities, such as money laundering, tax evasion and terrorism financing. Failure to comply could result in fines and imprisonment.

What Does the CTA Mean for my Nonprofit?

Your nonprofit is exempt from the CTA reporting requirements if it is one of the following:

• Described in Code Section 501(c) and exempt from federal income tax under Code Section 501(a) (You can usually confirm your nonprofit’s tax-exempt status on the IRS’ website)
• A Code Section 527 political organization
• A Code Section 4947(a) charitable trust
• A wholly owned subsidiary of any of the nonprofits listed above
• An entity that operates exclusively to provide support to any of the nonprofits listed above

However, if your nonprofit loses its tax exempt status, you will have 180 days from the date the IRS revoked the exemption to file a CTA annual report. This deadline will generally come before your nonprofit is able to reinstate its tax-exempt status.

What if I am Forming or Want to Form a Nonprofit?

The CTA does not exempt nonprofits whose applications for tax exemption are pending with the IRS. Therefore, your nonprofit may be required to comply with the CTA if it has filed an application for exemption and is awaiting a determination.

That said, entities created prior to Jan. 1, 2024, have one year to comply with the CTA. A nonprofit that has already filed an application for exemption should hear back from the IRS before the end of 2024, in which case, the nonprofit could potentially circumvent the CTA reporting requirements. If your nonprofit falls into this category, keep a watchful eye on the calendar to ensure you comply with the CTA reporting requirements if necessary.

If you form a nonprofit after Jan. 1, 2024, your nonprofit will have 90 days from the date of creation to file its initial CTA report. It is highly unlikely that your nonprofit will receive its tax-exempt status from the IRS prior to the 90-day filing deadline because the IRS is currently taking 6 to 10 months to review exemption applications. Because of this processing delay, your nonprofit will likely be required to file an initial CTA report. Your nonprofit will continue to be subject to the CTA reporting requirements unless and until it receives tax-exempt status from the IRS.

What About Government Entities and Homeowner Associations?

Government entities are generally exempt from the CTA. Specifically, the CTA reporting requirements do not apply to entities that meet both of the following criteria:

• Were established under the laws of the United States, an Indian tribe, a state, or a political subdivision
• Exercise governmental authority on behalf of the United States or any such Indian tribe, state or political subdivision

Homeowner associations that are tax-exempt under Code Section 528 (as opposed to Code Section 501(c)(4), as was historically the case) are not exempt from CTA reporting requirements. Other Code Section 528 nonprofits that are also subject to the CTA include condominium management associations, residential real estate management association and timeshare associations.

Key Takeaways

Existing nonprofits that already have their tax-exempt status will largely be exempt from the CTA reporting requirements unless they lose their exemption or decide to form a subsidiary or enter into a joint venture with a for-profit entity. Nonprofits whose tax-exempt statuses are currently pending and nonprofits that are in the early formation stages — just a thought in the minds of their founders — should take notice of the CTA to ensure compliance as necessary.

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