With January 2025 fast approaching, when all of the existing companies as of 1 January 2024 will have their first reporting obligation, we aim to:
- raise awareness among our clients and the business community in general,
- refresh the knowledge of the stakeholders and
- share insights on several topics that are often raised during the discussion of this topic.
First, we would like to reference our general summary of the Corporate Transparency Act (CTA), which outlines the rules regarding the companies subject to report, the deadlines and several key definitions.
This article focuses on two important topics relevant to many companies: the “Large operating company” exemption and the “Subsidiary of certain exempt entities” exemption.
We are here to provide support and guidance every step of the way.
Large operating company
There are 23 exemption categories under the CTA; however, privately held companies not already subject to strict government reporting requirements will most likely escape the reporting burden under the 21st exemption. The CTA defines these entities as follows:
- “(I) employs more than 20 employees on a full-time basis in the United States:
- (II) filed in the previous year Federal income tax returns in the United States, demonstrating more than $5,000,000 in gross receipts or sales in the aggregate, including the receipts or sales of
- (aa) other entities owned by the entity; and
- (bb) other entities through which the entity operates; and
- (III) has an operating presence at a physical office within the United States”
Although the above definition seems straightforward, there are several important details that should be considered when applying the above rules to a specific company or group of companies.
First, it is important to note that all three of the above criteria must be met to qualify, meaning that the headcount, income and presence should be fulfilled simultaneously. Second, a full-time employee is an individual who works, on average, 30 hours a week for the company. The headcount requirement applies on an entity level; in other words, a group of companies are not allowed to aggregate the number of their employees. There is better news in connection to the gross receipts criterion because if an affiliated group is filing a consolidated return, the amount should be considered on the consolidated return of the group. The operating presence requirement should be straightforward; companies without a physical office cannot qualify.
It can be concluded from the above that real operating entities above a certain size are not the ones that FinCEN is concerned about.
Subsidiary of certain exempt entities
The CTA has another practical exemption that is related (among others) to the above-mentioned category. It states the following: “any corporation, limited liability company, or other similar entity of which the ownership interests are owned or controlled, directly or indirectly, by 1 or more entities described in clause… or (xxi).”
The above is a great relief for the subsidiaries of Large operating entities owned or controlled by such an exempt company. It should be emphasized that the rules are “downstream”; therefore, it does not automatically exempt holding entities or other shareholders in the ownership chain that are above the exempt company. There is a more nuanced exemption for parties higher in the ownership chain; FinCEN states the following: “You do not need to report information about any beneficial owner whose ownership interests in a reporting company are held through one or more entities, all of which are themselves exempt from the reporting company definition.” We suggest a detailed review of the rules in connection to such entities.
Should you have any questions about CTA or the topics discussed above, please contact your Grassi advisor or Gabor Kiss directly.
