CTA Update | January 31, 2025
Notable Developments
- FinCEN halts CTA enforcement
- S-Corp Advisor in the WSJ
- Our Latest Podcast with CIR Litigation Director
- Delay Bill Reintroduced
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FinCEN Halts CTA Enforcement (Despite SCOTUS Ruling)
Last Friday the Financial Crimes Enforcement Network announced that businesses and covered entities are still not obligated to file under the CTA, so long as the ruling in Smith v. Treasury remains in place. Here’s the alert:
On January 23, 2025, the Supreme Court granted the government’s motion to stay a nationwide injunction issued by a federal judge in Texas (Texas Top Cop Shop, Inc. v. McHenry—formerly, Texas Top Cop Shop v. Garland). As a separate nationwide order issued by a different federal judge in Texas (Smith v. U.S. Department of the Treasury) still remains in place, reporting companies are not currently required to file beneficial ownership information with FinCEN despite the Supreme Court’s action in Texas Top Cop Shop. Reporting companies also are not subject to liability if they fail to file this information while the Smith order remains in force. However, reporting companies may continue to voluntarily submit beneficial ownership information reports.
That good news came just a day after an unfavorable ruling in the Supreme Court that struck down separate nationwide injunction issued by a Texas court in the Texas Top Cop Shop case. However, a separate ruling in Smith v Treasury – which resulted in a stay of the CTA’s reporting deadline – was unaffected by the SCOTUS decision. Importantly, the Biden administration never appealed the January 7 Smith ruling, so as long as the DOJ under President Trump doesn’t do so, the pause should remain in place.
Finally, we’re closely watching NSBA v Yellen, which remains before the Eleventh Circuit and has a good chance of being heard by the Supreme Court this year. That appellate court heard oral arguments last fall and we expect a ruling to be handed down at any time now.
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S-CORP Advisor in the WSJ
Longtime S-Corp advisor and partner at the Milwaukee-based law firm Meissner Tierney Fischer and Nichols has a great Letter to the Editor that ran in the Wall Street Journal over the weekend. Entitled “Don’t bet on criminals and terrorists to be transparent,” it reads:
In “A Key Tool to Fight Terrorists and Criminals” (Letters, Jan. 10), Nate Sibley notes that the Corporate Transparency Act “is intended to tackle the pervasive use of shell companies.”
One problem: I’m a lawyer and I’ve talked with all my terrorist clients. None intends to comply with the CTA. The utility of the statute, then, depends first on all law-abiding citizens registering their entities—at an aggregate cost of “approximately $22.7 billion in the first year and $5.6 billion in the years after,” according to the Financial Crimes Enforcement Network. FinCEN then must digest this massive haystack of information to identify the needle of unreported scofflaw entities.
Mr. Sibley also notes that “there is no fee and most owners can simply file and forget,” except that they have an obligation to update the information for the rest of their lifetimes. He also assures us that data, which includes photo IDs, are “accessible only to law enforcement agents.” Has he read the papers regarding the Chinese hackers breaching closely guarded government databases? What could go wrong?
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Our Latest Podcast with CIR Litigation Director
S-Corp recently took a break from tax policy on our Talking Taxes in a Truck podcast and chatted with Caleb Kruckenberg, Litigation Director for the Center for Individual Rights. Caleb breaks down the latest rulings out of SCOTUS and the Texas Eastern District, the interplay between cases currently being appealed in the Eleventh and Fifth Circuits, additional challenges that have been filed across the country, and the Trump administration’s response.
For anyone looking for a crash course on how we got here and what to expect, be sure to listen here.
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Delay Bill Reintroduced
Congressman Zach Nunn (R-IA) last week reintroduced his CTA delay bill, following up on his efforts to move similar legislation in the previous session. Notably, the bill enjoys support from an even split of Democrats and Republicans, as well as the backing of House Whip Tom Emmer (R-MN). Information on the bill can be accessed here.
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Legal Update
As a reminder, there are (by our count) eleven cases in various courts across the country challenging the validity of the CTA. Here are the links:
- Alabama (appealed): NSBA et al v. Yellen (11/15/2022)
- Ohio: Robert J. Gargasz Co., L.P.A. et al v. Yellen (12/29/2023)
- Michigan: Small Business Association of Michigan et al v. Yellen (3/1/2024)
- Maine: William Boyle v. Yellen (3/15/2024)
- Texas: NFIB et al v Yellen (5/28/2024)
- Massachusetts: BECMA et al v Yellen (5/29/2024)
- Oregon: Firestone v Yellen (6/27/2024)
- Utah: Taylor v Yellen (7/29/2024)
- Virginia: Community Associations Institute v. Janet Yellen (9/10/2024)
- Texas: Samantha Smith and Robert Means v. Treasury (9/12/2024)
- Texas: Association of American Physicians & Surgeons et al v Yellen (10/28/2024)
The Experts are Wrong (Part V)
Several months ago, we asked Penn Wharton to help us score some ideas on tax reform. They politely declined. Too busy analyzing the 199A deduction, apparently. Their new paper on the deduction makes two points — the first is wrong and the second, while interesting, is not particularly helpful.
Their first point is that “Section 199A provides a 20 percent reduction in the tax rate for qualified business income relative to ordinary income tax rates.” That’s wrong. The Section 199A deduction reduces a pass-through’s Qualified Business Income, not the tax rate. The deduction makes no claims on tax rates.
This mischaracterization enables the Wharton folks to identify a non-existent “excess” benefit that rhetorically strengthens their case for changing the policy. That was never the policy, however, so there’s no excess benefit and no underlying rationale for the changes.
The straw man gets even more itchy when you incorporate the revenue raisers included in the TCJA. Remember, Section 199A wasn’t just about parity. It was about avoiding a tax hike on Main Street businesses. To calculate the real 199A benefit, you would need to net out base broadeners like the SALT cap, 163(j), the excess loss deduction cap, the loss of the manufacturing deduction, the amortization of R&E expenses, among others.
Finally, Wharton ignores the 199A guardrails. Not everybody gets a 20 percent deduction because QBI excludes foreign income and 1231 gains. So is income excluded from QBI due to the SSTB designation and other guardrails. The result is many larger pass-through businesses see a significantly reduced 199A deduction, while others see no deduction at all.
Add those tax hikes and limitations back into the calculator, and Wharton’s excess benefit quickly becomes a deficit.
Wharton’s second point, meanwhile, is interesting, but not really all that important. They observe that the interaction of 199A and the progressive rate schedule means some business owners with incomes hovering around the bracket inflection points might see a tax benefit that exceeds 20 percent. Setting aside the above objections, what of it? Again, the deduction was set at 20 percent, not the tax benefit. By comparison, the C corporation rate reduction from 35 to 21 percent is 40 percent. Talk about excess benefits!
What’s interesting is that Wharton’s so-called “excess benefit” is concentrated among lower- and middle-income pass-through owners. Larger businesses don’t benefit from this dynamic because their income stays above the top rate threshold, even after the deduction.
So if policymakers follow the Wharton recommendation, smaller pass-through businesses would shoulder the bulk of the tax hike.
In other words, not much to see here, folks. If the Wharton folks wanted to be helpful in this debate, they could study how the double corporate tax distorts behavior and hurts job creation, or how most of the tax benefit of the TCJA went to regular families and small businesses rather than billionaires, or how tax revenues have been strong post-TCJA while spending has spun out of control, or how the tax code favors public companies at the expense of family businesses. Haha, we jest. That’s not going to happen. Might as well ask Jared Bernstein why the government needs to borrow money.
Congress is going to extend the 199A deduction this year, but it will have to be without the help of the experts and the academics.
Talking Taxes in a Truck Episode 40: Decoding the CTA Legal Fight with Caleb Kruckenberg
The Corporate Transparency Act enforcement has been on quite a roller coaster in the past two months, so Main Street businesses can be forgiven if they have lost track of their filing obligations. To help shed some light on the issue, we’re joined by Caleb Kruckenberg, the Center for Individual Rights’ Litigation Director. Caleb breaks down the latest rulings out of SCOTUS and the Texas Eastern District, the interplay between cases currently being appealed in the Eleventh and Fifth Circuits, additional challenges that have been filed across the country, and the Trump administration’s response.
This episode of Talking Taxes in a Truck was recorded on January 27, 2025, and runs 41 minutes long.
The Winds of Change (and Taxes)
The Senate confirmed Scott Bessent to run the Treasury Department yesterday, which means there’s a new sheriff in town. That’s good news for the millions of Main Street businesses targeted by the Biden Administration for higher taxes and more onerous regulations.
But Main Street didn’t have to wait for Bessent’s confirmation to see how the landscape has changed under Trump. We’ve already seen material differences that promise relief now and in the future.
Example one is their approach to Europe’s Pillar 2 minimum tax campaign. Pillar 2 is a poorly disguised effort by the EU to target large US multinationals for more tax, but it has Main Street implications too. Here’s what we told the Global Competitiveness Tax Team last fall:
The current plan includes a carve-out for business income in the US that passes through to a taxpayer when the taxpayer pays a sufficiently high effective tax rate. For those pass-through businesses, they effectively would be exempt from the proposed Pillar 2 minimum tax regime.
The carve-out, however, only applies if the direct shareholder of the pass-through entity pays tax, either as an individual or a trust (such as an ESBT). In situations where an S corporation has trust ownership where the trust is not taxed directly — such as a grantor trust where the grantor pays the tax rather than the trust – the taxes paid by the indirect owner would not count towards the minimum tax, so a family businesses with trust ownership would be at increased risk of paying the Pillar 2 top-up taxes.
There is an additional challenge. Most S corporations with foreign operations make a check-the-box election to treat their foreign subsidiaries as branches and thus all the branch income – less applicable foreign tax credit offsets – flows onto the S corporation return and is taxed at the shareholder level. As currently drafted, however, this foreign subsidiary income is not eligible for the carve-out referenced above where the direct owner of the S corporation is a taxpayer….
Finally, in an issue that affects both S corporations and C corporations, it is unclear whether any Pillar 2-type minimum tax payments would be credited against the company’s US tax liability, as are other foreign taxes paid by US businesses. Ensuring that a business receives credit for the foreign taxes it pays is a critical means of ensuring US businesses are not penalized for operating overseas.
So Main Street businesses with oversees income were at risk of double taxation under Pillar 2. What’s the Trump Administration doing to protect them? Pulling out of Pillar 2. Here’s what the Executive Order issued on January 20 says:
The OECD Global Tax Deal supported under the prior administration not only allows extraterritorial jurisdiction over American income but also limits our Nation’s ability to enact tax policies that serve the interests of American businesses and workers. Because of the Global Tax Deal and other discriminatory foreign tax practices, American companies may face retaliatory international tax regimes if the United States does not comply with foreign tax policy objectives. This memorandum recaptures our Nation’s sovereignty and economic competitiveness by clarifying that the Global Tax Deal has no force or effect in the United States.
Amen to that.
Example two is FinCEN’s recent announcement that it will not challenge a court order blocking enforcement of the Corporate Transparency Act. S-Corp readers know firsthand the roller-coaster of actions by the courts and FinCEN over the past two months, during which the filing deadline was blocked, then stayed, then blocked again, etc. This legal carnival ride over the holidays was harming tens of millions of businesses, but didn’t seem to bother the previous administration. They were determined to implement the CTA regardless of the cost.
No more. Under Trump, the Treasury Department and FinCEN are acting like adults and pausing enforcement until the courts can run through the eleven federal cases challenging the law’s legitimacy. Here’s the announcement:
On January 23, 2025, the Supreme Court granted the government’s motion to stay a nationwide injunction issued by a federal judge in Texas (Texas Top Cop Shop, Inc. v. McHenry—formerly, Texas Top Cop Shop v. Garland). As a separate nationwide order issued by a different federal judge in Texas (Smith v. U.S. Department of the Treasury) still remains in place, reporting companies are not currently required to file beneficial ownership information with FinCEN despite the Supreme Court’s action in Texas Top Cop Shop. Reporting companies also are not subject to liability if they fail to file this information while the Smith order remains in force.
So business owners can return to running their businesses while the courts do their work. How rational.
A final example of how the policy winds have shifted comes from Bessent’s nomination hearing. Under Biden, the focus was on how to raise taxes. Under Trump, its how to keep them low. Here’s the new Secretary:
As we begin 2025, Americans are barreling towards an economic crisis at year’s end. If Congress fails to act, Americans will face the largest tax increase in history, a crushing $4 trillion tax hike. We must make permanent the 2017 Tax Cuts and Jobs Act and implement new pro-growth policies to reduce the tax burden on American manufacturers service workers and seniors. I have already spoken with several members of this Committee, as well as leaders in the House about the best approach to achieving these important goals together.
So lower taxes, less silly regulation, and a stronger defense of our economic interests overseas. It’s early, but clearly a good start for Main Street.
CTA Filing Pause Still in Effect
Good news! While the Supreme Court yesterday sided with the federal government in striking down an injunction against the Corporate Transparency Act, FinCEN quickly stepped in with an announcement that the filing requirements remain on hold so long as a second ruling remains in place. Here’s the notice currently posted on FinCEN’s website:
On January 23, 2025, the Supreme Court granted the government’s motion to stay a nationwide injunction issued by a federal judge in Texas (Texas Top Cop Shop, Inc. v. McHenry—formerly, Texas Top Cop Shop v. Garland). As a separate nationwide order issued by a different federal judge in Texas (Smith v. U.S. Department of the Treasury) still remains in place, reporting companies are not currently required to file beneficial ownership information with FinCEN despite the Supreme Court’s action in Texas Top Cop Shop. Reporting companies also are not subject to liability if they fail to file this information while the Smith order remains in force. However, reporting companies may continue to voluntarily submit beneficial ownership information reports.
As a reminder, yesterday’s SCOTUS decision addressed whether the nationwide injunction against the CTA could remain in place pending the outcome of an appeal in the Fifth Circuit. Here’s how the litigants in the first Texas case described the situation after news of that ruling:
Although the Court’s decision lifts the injunction blocking the enforcement of the CTA in this case, FinCEN is still barred from enforcing the law under a second order issued in January. That second order is not automatically lifted by today’s decision. The ball is now in the Trump administration’s court to extend or stay the filing deadline and protect millions of neighborhood associations, small businesses, and community organizations from the CTA’s unjustified burden, prevent them from incurring billions of dollars in compliance costs, and give Congress the time it needs to reconsider this mistaken policy.
But as the Wall Street Journal points out, a separate ruling issued earlier this month also blocks enforcement of the FinCEN rules, including the January 1 filing deadline:
A nationwide order issued on Jan. 7 by Judge Jeremy Kernodle, also of the Eastern District of Texas, in a separate case challenging the CTA apparently remains in place. That order continues to block the implementation and enforcement of the CTA nationwide. The court docket in the case doesn’t show an appeal by the government.
…“Our position is that our injunction is still in effect,” said Chance Weldon, a lawyer for plaintiffs in the case. Weldon said the government is still within the window to appeal.
And last, the Journal of Accountancy:
However, the Texas Public Policy Foundation (TPPF), which represented the plaintiffs in the second case, Samantha Smith and Robert Means vs. U.S. Department of Treasury, said in a news release Thursday that its case is not affected by the one in which the Supreme Court issued a stay.
“As the judge who issued the order emphasized, TPPF’s case is based on different facts and arguments from the one in front of the Supreme Court,” the release said. In that case, the judge cited 5 U.S. Code Sec. 705, relief pending review, which says a reviewing court “may issue all necessary and appropriate process to postpone the effective date of an agency action to preserve status or rights.”
…”There is still a BOI injunction in place,” Melanie Lauridsen, the AICPA’s vice president–Tax Policy & Advocacy, said in a LinkedIn post.
So while today’s announcement from FinCEN provides some much-needed relief, it’s safe to say confusion still reigns among the Main Street business community, which woke up to the following headlines:
- Washington Post: Supreme Court Clears Ways for Corporate Transparency Law to Take Effect
- Courthouse News Service: Supreme Court lifts pause on Corporate Transparency Act
- Bloomberg Law: Supreme Court Allows Corporate Transparency Act Enforcement
- HBS Dealer: The Beneficial Ownership Information rule is back
The new Trump administration has an opportunity to put the CTA’s filing requirements on hold for good and give Main Street the certainty it needs. One of two possible next steps should do the trick:
- Issue an EO or other statement officially delaying the filing deadline to the end of the year to give businesses certainty and the courts time to work through all the arguments; and/or
- Formally announce it will continue to not challenge the second ruling, leaving that decision intact and the CTA filing requirements on hold.
We know many key members of the Trump administration (including Vice President JD Vance and former SBA Administrator Linda McMahon) already oppose the CTA and its onerous data grab. Yesterday’s court ruling gives them a chance to put that opposition into action. Let’s hope they’re paying attention.