Tax Updates

Starting January 1, 2024, a significant number of businesses will be required to comply with the Corporate Transparency Act (“CTA). The CTA was enacted into law as part of the National Defense Act for Fiscal Year 2021. The CTA requires the disclosure of the beneficial ownership information (otherwise known as “BOI”) of certain entities from people who own or control a company.

It is anticipated that 32.6 million businesses will be required to comply with this reporting requirement. The intent of the BOI reporting requirement is to help US law enforcement combat money laundering, the financing of terrorism and other illicit activity.

The CTA is not a part of the tax code. Instead, it is a part of the Bank Secrecy Act, a set of federal laws that require record-keeping and report filing on certain types of financial transactions. Under the CTA, BOI reports will not be filed with the IRS, but with the Financial Crimes Enforcement Network (FinCEN), another agency of the Department of Treasury.

The following information is meant to be general-only and should not be applied to your specific facts and circumstances without consultation with a professional adviser.

 What entities are required to comply with the CTA’s BOI reporting requirement?

 Entities organized both in the U.S. and outside the U.S. may be subject to the CTA’s reporting requirements. Domestic companies required to report include corporations, limited liability companies (LLCs) or any similar entity created by the filing of a document with a secretary of state or any similar office under the law of a state or Indian tribe.

Domestic entities that are not created by the filing of a document with a secretary of state or similar office are not required to report under the CTA.

 Are there any exemptions from the filing requirements?

 There are 23 categories of exemptions. Included in the exemptions list are publicly traded companies, banks and credit unions, securities brokers/dealers, public accounting firms, tax-exempt entities and certain inactive entities. Please note these are not blanket exemptions and many of these entities are already heavily regulated by the government and thus already disclose their BOI to a government authority.

In addition, certain “large operating entities” are exempt from filing. To qualify for this exemption, the company must:

1. Employ more than 20 people in the U.S.;
2. Have reported gross revenue (or sales) of over $5M on the prior year’s tax return; and
3. Be physically present in the U.S.

 Who is a beneficial owner?

 Any individual who, directly or indirectly, either:

• • Exercises “substantial control” over a reporting company, or
  • Owns or controls at least 25 percent of the ownership interests of a reporting

An individual has substantial control of a reporting company if they direct, determine or exercise substantial influence over important decisions of the reporting company. This includes any senior officers of the reporting company, regardless of formal title or if they have no ownership interest in the reporting company.

When must companies file?

There are different filing timeframes depending on when an entity is registered/formed or if there is a change to the beneficial owner’s information.

• New entities (created/registered in 2024) — must file within 90 days
• New entities (created/registered after 12/31/2024) — must file within 30 days
• Existing entities (created/registered before 1/1/24) — must file by 1/1/25
• Reporting companies that have changes to previously reported information or discover inaccuracies in previously filed reports — must file within 30 days

 What sort of information is required to be reported?

 Companies must report the following information: full name of the reporting company, any trade name or doing business as (DBA) name, business address, state or Tribal jurisdiction of formation, and an IRS taxpayer identification number (TIN).

Additionally, information on the beneficial owners of the entity and for newly created entities, the company applicants of the entity is required. This information includes name, birthdate, address, and unique identifying number and issuing jurisdiction from an acceptable identification document (e.g., a driver’s license or passport) and an image of such document.

 Risk of non-compliance

Penalties for willfully not complying with the BOI reporting requirement can result in criminal and civil penalties of $500 per day and up to $10,000 with up to two years of jail time.

The FinCen website that will be used to report BOI information is available as of January 1, 2024. FinCen is also working to create a third-party e-file system to allow us to assist you with meeting your filing obligations. Businesses in existence as of December 31, 2023 have the entire 2024 calendar year to meet the initial filing requirements.

Itemized deductions are deducted if total itemized deductions exceed a taxpayer’s standard deduction amount. The standard deduction amount is based on filing status. The greater of itemized deductions or the standard deduction amount is subtracted from adjusted gross income in arriving at taxable income. For 2022 the standard deduction amounts are:

Married filing jointly – $25,900

Married filing separately – $12,950

Head of household – $19,400

Single – $12,950

An additional standard deduction is allowed for taxpayers over the age of 65, blind, or both 65 and blind. The additional standard deduction in 2022 is $1,750 for single taxpayers and $1,400 for married taxpayers.

When married taxpayers file separate tax returns, both spouses must either itemize deductions or use the standard deduction amount. This rule is to prevent taxpayers from receiving larger deductions than would be available if a joint return was filed.

The standard deduction amount for a taxpayer who is a dependent of another taxpayer is limited to the greater of $1,150 or earned income (generally wages) plus $400. The standard deduction amount for a dependent can never be more than $12,950 in 2022.

The death of a taxpayer does not affect the standard deduction amount. A taxpayer is entitled to a full standard deduction regardless of the date of death.

Congress enacted the 20 percent business deduction beginning in 2018 to coincide with the tax rate reduction provided to corporations. The 20 percent business income deduction effectively reduces the maximum tax rate on an individual’s business income to 29.6 percent (80 percent of the maximum income tax rate of 37 percent). The business income deduction is not allowed when calculating self-employment income. The business income deduction is limited to 20 percent of taxable income.

WHAT IS BUSINESS INCOME?

The Internal Revenue Code allows individuals to deduct 20 percent of business income in computing taxable income. For sole proprietors, business income is calculated as the amount reflected on schedule C adjusted for items discussed below. Business income includes income from rental real estate properties if the taxpayer spends at least 250 hours per year managing and maintaining the rental properties.

For sole proprietors, business income is calculated as the amount reflected on schedule C less the self-employed health insurance deduction, the deductible portion of the self-employment tax, and pension plan contributions related to the taxpayer’s business. Business income does not include income from the sale of business assets treated as long-term capital gains.

CALCULATION OF BUSINESS INCOME DEDUCTION

An example of the calculation of the business income deduction is as follows:

John and Mary file a 2022 joint return and have taxable income of $300,000 before calculating the business income deduction. Mary’s business income is $280,000. The business income deduction allowed on their joint tax return is calculated as the lesser of 1) 300,000 x 0.2 = $60,000 or 2) $280,000 x 0.2 = $56,000. The business income deduction allowed on John and Mary’s joint tax return is $56,000.

In the above example the business income deduction is not limited by taxable income. If a taxpayer’s only source of income is derived from a sole proprietorship, the business income deduction will be limited to 20 percent of taxable income because the taxpayer is entitled to a standard deduction available to all taxpayers.

HIGHER INCOME TAXPAYERS

The business income deduction for higher income taxpayers is either phased out or limited. For service businesses, the business income deduction is reduced or eliminated. For non-service businesses, the maximum business deduction is subject to additional limitations based on wages paid by the business and the cost of property used in the business.

Service businesses include businesses providing services in the fields of health, law, accounting, actuarial science, performing arts, consulting, and athletics. Businesses providing financial and brokerage services, investing services, and trading and dealing in securities are also considered service businesses under the business income deduction rules.