Committee Reviews CTA’s Future
Earlier today a House Financial Services subcommittee held a hearing entitled, “Following the Money: Tools and Techniques to Combat Fraud.” The hearing covered many topics, but the conversation returned time and again to the awful Corporate Transparency Act.
The hearing kicked off with Congressman Warren Davidson (R-OH) – who leads the charge to repeal the statute – making the case for the Treasury Department’s recent overhaul of the CTA rules:
Presumably, operating a business or even a homeowners association, means you are engaged in illicit finance. Meanwhile, our Constitution says that when the government wants to know private information, they need probable cause (or reasonable suspicion) to get a warrant or subpoena. Surely we can minimize the financial harm suffered by Americans exploited by scammers without infringing on their civil liberties or adding ways to make ordinary Americans criminals.
Later in the hearing, our friends at NFIB listed additional reasons to dislike the CTA. Here’s Jeff Brabant:
Small businesses have also faced other forms of phishing and scams from the CTA. I have heard from many small business owners who have sought assistance to file their BOI. Many have had to pay their CPAs or hire an outside counsel to assist with their filings. This is an unnecessary added cost that has increased red tape and compliance burdens for small businesses. Others have fallen prey to profit companies, which may be scam operators, offering to file BOI data. A recent search of “CTA BOI Filing” on Google demonstrates this problem.
…Just last week, an Indiana farmer contacted NFIB regarding one of these scam companies. This farmer had begun the process to file through a scam company but did not complete the filing. Still, this farmer had $249 charged to his credit card. Now, the farmer is searching for a refund but will likely be without redress.
S-Corp’s own inbox is littered with similar solicitations so the experience shared by Jeff’s members is not unique.
The hearing also offered a glimpse into the mindset that allowed the CTA to be enacted in the first place. One member argued that the CTA wasn’t that onerous and that the penalties for noncompliance – including fines and jail time – do not threaten law-abiding owners because they only apply for “willful” violations. What’s so hard about reporting the name, address, date of birth, and driver’s license of a business owner?
These comments reflect three fundamental misunderstandings of the law – 1) the CTA doesn’t just apply to small, simple business structures, 2) the beneficial ownership information (BOI) collected extends far beyond the actual owners of an entity and 3) the information reported must be updated continuously.
First, the CTA is focused on legal entities, not enterprises. A mid-sized business with multiple locations will have multiple legal entities. It will have to file for each of them and supply the correct BOI for each. S-Corp has members with thousands of employees and billions in revenue who will have to file under the CTA. Other members will have to file hundreds of separate reports. There is an entire industry of law firms and CPAs dedicated to CTA compliance.
Second, the CTA defines a beneficial owner as both the actual owners and anybody else exerting substantial control within an enterprise. That includes executives, supervisors, board members, consultants, legal counsel. That mid-sized business might have dozens of so-called beneficial owners. Somebody within the business will have to decide whose BOI gets reported. That’s a willful decision that better be right.
Third, BOI reporting is not just a one-time event. It has to be updated within 30 days of a change. So that mid-sized company will have to review, every 30 days, all their submitted information and update any changes. Did somebody leave the company or get hired? Did we take on new partners? Did anybody move? Every thirty days.
One last thing – the criminals aren’t going to self-report their crimes. The CTA database would have included the personal information of about 100 million law abiding owners and their employees, and little to no information about the crooks.
The good news is this is all in the past, at least for now. The new Treasury rules exempt most businesses from having to file these reports. But the hearing also made clear why a permanent fix is necessary.
The Main Street Community will continue to work with Representative Davidson and other allies to repeal the CTA entirely and replace it with something more thoughtful, targeted, and effective. A risk-based approach that follows the money would be less intrusive and more effective. S-Corp will have more to say on that front in the future.
The Economic Risk of Cliff Diving
A key paragraph from today’s Politico Tax highlights a critical issue for Main Street businesses:
A good number of economists already say that extending the expiring TCJA individual provisions wouldn’t do much to further spur the economy. That’s part of the reason that Trump and his team are plugging some of his more targeted tax cut ideas, while other key Republicans are talking up key tax breaks for businesses, like full expensing for capital investments.
But that focus misses the point entirely. The question isn’t whether extending current policy would provide a bump– it’s whether allowing a massive tax hike to happen would deal a significant blow to the economy and millions of Main Street employers?
The answer is a clear “Yes”: Failure to act means higher taxes, fewer jobs, and lower growth. Our recent EY analysis of the Section 199A deduction shows that as many as 2.6 million jobs, $161 billion in wages, and $325 billion of national income are at risk if Congress fails to extend current tax rates and we ultimately go over the fiscal cliff.
Every state in the country would be adversely affected:
As we’ve written many times before, 199A was enacted to 1) encourage job creation and economic growth, 2) help restore tax parity between pass-throughs and the 21-percent corporate rate, and 3) prevent a massive tax hike on millions of employers.
That last point deserves to be emphasized – the TCJA included revenue raises in addition to tax cuts. Many of those policies – like the cap on interest deductions and R&E amortization – are permanent and apply to pass-throughs just the same as C corporations. They would remain in place even if we go over the fiscal cliff and the 199A deduction is allowed to expire.
That’s may be good news for the Fortune 500, but it’s bad news for the communities and workers who rely on private and family-owned companies.
Fortunately, lawmakers understand the gravity of the situation and are moving quickly on a tax package. The House and Senate have coalesced around a single-bill strategy and we could see a Senate budget vote as early as this week. The stakes are high but recent movement gives us confidence that a favorable outcome is still possible. For the Main Street community, now is the time to connect with your Senator and Representative and make sure they understand the importance of 199A to your business, your employees, and your community. It’s now or never.
Main Street Cheers CTA Relief
Treasury last week made good on its promise to deliver much-needed relief from the Corporate Transparency Act, a move that did not go unnoticed by the Main Street business community. In a letter sent earlier today, over 100 trade associations applauded a new interim rule that exempts American companies from the CTA’s onerous reporting requirements and implements a risk-based enforcement approach instead. The letter reads:
This rule appropriately narrows the scope of entities required to report BOI by exempting domestic reporting companies and U.S. persons who are beneficial owners of foreign reporting companies. By doing so, the Department has alleviated substantial compliance burdens that would have disproportionately affected law-abiding Main Street businesses, while also shifting to a risk-based enforcement protocol that will ultimately strengthen the effectiveness of the CTA.
The original CTA reporting requirements encompassed an estimated 32 million legal entities with 20 or fewer employees or $5 million or less in revenues, effectively targeting nearly every small business in the United States. The interim final rule’s exemption for domestic reporting companies ensures that these businesses can continue to operate without the added complexity and potential penalties associated with BOI reporting. Furthermore, additional narrow exemptions for certain U.S. persons demonstrate a balanced consideration of privacy concerns and the practicalities of compliance.
We believe these revisions will allow the Department to focus its resources on entities that pose genuine risks of money laundering and other illicit activities, thereby enhancing the effectiveness of our nation’s financial crime prevention efforts without imposing undue burdens on legitimate businesses.
FinCEN is accepting comments on the new regulations for 60 days, after which we expect the final rule will be codified as-is.
Meanwhile, proponents of the CTA are not taking the loss well and have signaled a possible legal challenge. The good news is that, as we pointed out recently, the CTA explicitly grants regulators the authority to exempt a class of entities (in this case domestic businesses) from the reporting requirements. Here’s the interim rule with additional details:
The CTA also authorizes the Secretary of the Treasury (Secretary) to exempt any other “entity or class of entities” for which the Secretary, with the written concurrence of the Attorney General and the Secretary of Homeland Security, has, by regulation, determined that “requiring beneficial ownership information from the entity or class of entities . . . would not serve the public interest” and “would not be highly useful in national security, intelligence, and law enforcement agency efforts to detect, prevent, or prosecute money laundering, the financing of terrorism, proliferation finance, serious tax fraud, or other crimes.” In addition, section 5318(a)(7) of the BSA provides that the Secretary may make appropriate exemptions from a requirement in the BSA or regulations prescribed under the BSA. Taken together, these provisions authorize the issuance of regulations that may provide additional exemptions from the requirements of the CTA.
It appears FinCEN is on solid footing here so we’re confident that any legal challenges would be unsuccessful.
Finally, as we wrote earlier this week, while these regulations are a massive step forward it’s now time for Congress and the courts to put the CTA to rest for good. The momentum is certainly on Main Street’s side but as we’ve seen time and time again with this ill-conceived law, it’s critical that we keep up the pressure.
FinCEN Releases CTA Relief Rule
More good news on the battle over privacy. Treasury’s Financial Crimes Enforcement Network on Friday released the following statement:
[T]he Financial Crimes Enforcement Network (FinCEN) is issuing an interim final rule that removes the requirement for U.S. companies and U.S. persons to report beneficial ownership information (BOI) to FinCEN under the Corporate Transparency Act.
In that interim final rule, FinCEN revises the definition of “reporting company” in its implementing regulations to mean only those entities that are formed under the law of a foreign country and that have registered to do business in any U.S. State or Tribal jurisdiction by the filing of a document with a secretary of state or similar office (formerly known as “foreign reporting companies”). FinCEN also exempts entities previously known as “domestic reporting companies” from BOI reporting requirements.
A couple of thoughts. First, this action clears up any remaining confusion as to whether domestic entities needed to file their beneficial ownership information. With Friday’s announcement, filing your information “just to be safe” no longer appears necessary. Big shout out to the new team at Treasury for getting these changes out the door so quickly. It could not have been easy.
Second, while the new rules alleviate the need to file, this relief is temporary. As long as the underlying CTA statute remains in place, a future administration could rewrite the rules to be more expansive.
That means permanent relief will have to come from the courts or Congress. The courts are teed up to act quickly, with pro-business rulings coming from District Courts in Alabama, Texas and Michigan just in the past year. Those rulings focused on the lack of constitutional authority underpinning the CTA as well as the damage it does to the protections of speech, association, federalism, and warrantless searches. As the recent Michigan decision noted:
The CTA’s reporting requirements reach indiscriminately across the smallest players in the economy to extract and archive a trove of personal data explicitly for future law enforcement purposes at an expected cost to the reporting players of almost $22 billion in the first year alone. The Fourth Amendment prohibits such an unreasonable search.
The CTA’s overreach is almost comical – thirty million law abiding small businesses and other legal entities forced to report the personal information of perhaps one-hundred million owners and their employees? The sheer scale of it suggests a successful challenge is a distinct possibility.
Failing that, however, Congress will have to act. It won’t be easy – support for the CTA extends across the aisle – but legislation to repeal the CTA has already been introduced, and the committees of jurisdiction are chaired by strong critics of the law – Representative French Hill of Arkansas and Senator Tim Scott of South Carolina.
An upcoming hearing in the House Financial Services Committee should give businesses a good idea of how the new congressional leadership intends to close the book on the CTA for good. It’s a bad idea that should never have been implemented in the first place.
Congressman Yakym Hosts 199A Roundtable
Members of the Main Street Employers Coalition convened in South Bend, Indiana, today for a roundtable discussion with Congressman Rudy Yakym, who represents the state’s Second District and sits on the tax-writing Ways & Means Committee. The sole focus of the event was the Section 199A deduction, a provision that is central to tens of millions of Main Street businesses organized as pass-throughs.
Photo Credit: James Payne, NECA
The roundtable took place at the offices of electrical services provider Koontz-Wagner, a more than 100-year-old firm that is also a member of the National Electrical Contractors Association, which helped spearhead the effort. During the discussion, business owners from across the region shared their perspectives on how the Section 199A deduction has helped them reinvest in their businesses, hire more employees, and give back to their communities. Many attendees also emphasized that the deduction provides parity between pass-through entities and large, publicly-traded corporations, which benefit from significantly lower tax rates.
As we’ve said several times before, privately-held companies are the backbone of countless local economies nationwide, and the data backs this up. In Congressman Yakym’s district, pass-through businesses employ around 6 out of every 10 workers. That’s not an aberration, either. Nationwide, private companies are responsible for 62.3 percent of all private sector jobs.
For more data showing the economic contribution of the pass-through sector be sure to download our mobile app
Congressman Yakym reaffirmed his commitment to fighting for Main Street businesses, highlighting the importance of making the Section 199A deduction permanent. He also acknowledged that the provision’s looming expiration – and the massive tax hike it represents – heightens the urgency when it comes to swift passage of a tax bill.
Fortunately, today’s roundtable shows that lawmakers are serious about preserving 199A and ensuring Main Street can continue to thrive and lift up the communities in which they operate. We thank Congressman Yakym for hosting this event and keeping the spotlight on 199A, and look forward to working with him to ensure a successful outcome.