Court Blocks Corporate Transparency Act, Affecting Reporting Requirements

 Posted on December 09, 2024 in Small Business Taxes

In an effort to combat illegal activities like money laundering, the United States Congress passed the Corporate Transparency Act (CTA). This law required companies to submit information about their owners to the Financial Crimes Enforcement Network (FinCEN). However, a recent court decision has temporarily halted this requirement. As the case continues to play out in federal court, business owners and stakeholders may be unsure about their reporting requirements or how they should proceed.

Because of the complex reporting requirements under the CTA and other laws and regulations, business owners, stakeholders, or other affected parties may need to consult with a San Jose, CA tax attorney who has a strong understanding of these legal issues. Small businesses and large corporations can work with legal counsel to take the appropriate steps and avoid potential penalties that may apply if they fail to address these concerns correctly.

What Are the Reporting Requirements Under the CTA?

To help the U.S. government regulate commerce and remain aware of illicit financial activities that could be related to violations such as money laundering, tax evasion, or financing terrorism, the CTA has required domestic companies to file Beneficial Ownership Information Reports (BOIRs). These reports identified a company’s "beneficial owners," which include people with ownership interests of 25% or more, as well as senior officers or other people who exercise control over companies.

When the CTA went into effect at the beginning of 2024, for entities already in existence, it required BOIRs to be filed by January 1, 2025. For entities formed between January 1, 2024 and December 31, 2024, the paperwork needed to be filed within 90 days of entity formation. Any changes to beneficial ownership information for a company required the filing of updated BOIRs within 30 days, and all new entities formed after December 31, 2024 would be required to file BOIRs within 30 days of entity formation. Around 32 million businesses throughout the United States were required to file beneficial ownership information.

Judge Rules That the CTA Exceeds Congress’s Authority

In the case of Texas Top Cop Shop v. Garland et al., which is currently being heard by the U.S. District Court for the Eastern District of Texas, a judge has issued a preliminary injunction that blocks the enforcement of the CTA. This case was brought by a firearms retailer in Texas, and other co-plaintiffs include the National Federation of Independent Business and other businesses and non-profit organizations. This injunction has now been appealed.

When issuing the injunction, the judge found that Congress exceeded its authority when creating the Corporate Transparency Act. While the U.S. Constitution’s Commerce Clause gives Congress the power to regulate commerce, the judge stated that the CTA overstepped this authority by requiring businesses and organizations to report information even if they do not engage in commercial activity. The judge also raised concerns about whether the CTA violated the rights of state governments under the 10th Amendment. The plaintiffs have also argued that the law violates the First Amendment by compelling them to disclose information and that there are privacy concerns regarding the information disclosed on BOIRs.

Contact Our San Jose, CA Business Tax Attorney

While this case is still ongoing, and additional legal challenges are likely to arise, the injunction has currently halted the requirement to file Beneficial Ownership Information Reports before the January 1, 2025 deadline. Businesses and personnel that may be concerned about their requirements under the Corporate Transparency Act can work with a San Jose, CA business tax lawyer to gain a full understanding of their legal obligations and the steps they may need to take to avoid potential penalties. To learn how John D. Teter Law Offices can help your business address tax-related concerns and other obligations under state and federal law, contact us at 408-866-1810 and set up a consultation.