CTA Update | December 12, 2024
Notable Developments
- Government digs in
- Vivek blasts CTA
- Congress working on delay
- CNBC highlights CTA “awareness” gap
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Legal Update
Just two days after the U.S. District Court for the Eastern District of Texas issued a nationwide injunction of the CTA, the federal government appealed the decision. The case now heads to the Fifth Circuit Court of Appeals, though no word yet on when we might see a ruling.
As noted earlier, the ongoing legal battle – which will likely bleed into 2025 – makes it even more critical that an official delay be enacted. Without one, we could see an outcome where the injunction is halted next year, meaning the tens of millions of entities that did not file due to the injunction would then be out of compliance. That’s the last thing Main Street businesses want looming over their head.
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Regulatory Update
Vivek Ramaswamy, who has been tapped by President-elect Donald Trump to help lead a new Department of Government Efficiency (DOGE), took to X.com yesterday to call out the CTA’s reporting requirements:
Two-point-four million views! Slightly more than the S-Corp feed gets. Vivek is the latest incoming Trump official highlight this regulatory trainwreck, further suggesting the Trump administration will help us to repeal, or at the very least modify, the CTA once in office.
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Legislative Update
Fresh on the heels of last week’s favorable court ruling, several House members signed a letter once again urging FinCEN to implement a delay, as well as clear guidance to affected entities. It reads, in part:
While Judge Mazzant’s ruling provides temporary relief by staying the compliance deadline, it has also introduced significant ambiguity for businesses attempting to comply with the CTA’s requirements. The court’s finding that the CTA and its reporting rule are likely unconstitutional underscores the need for FinCEN to reconsider its enforcement strategy during this period of legal uncertainty. As stewards of public trust, it is imperative that FinCEN provide clear, actionable guidance to ensure small businesses are not unduly burdened or penalized.
Specifically, we urge FinCEN to immediately issue interpretative guidance or a formal public statement clarifying how this injunction affects compliance obligations. Further, we strongly encourage FinCEN to formally delay enforcement of the BOI reporting requirements until the legal challenges to the CTA are resolved and there is greater clarity on the obligations of reporting companies. It is unreasonable to expect small businesses to navigate this uncertainty without fear of penalties for noncompliance.
Even with the nationwide injunction currently in place, it’s critical that a formal delay be implemented through legislative or regulatory action. There are multiple scenarios under which the Texas court ruling could be overturned and Main Street businesses need some semblance of certainty going into next year.
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Media Update
A recent CNBC piece looks at the latest BOI filing data, which shows the massive number of businesses that have yet to submit their required reports:
The federal government had received about 9.5 million filings as of Dec. 1, according to statistics FinCEN provided to the office of Rep. French Hill, R-Ark., who has called for the repeal of the Corporate Transparency Act. Hill’s office provided the data to CNBC. That figure is about 30% of the estimated total.
… The scope of national compliance is “bleak,” the S-Corporation Association of America, a business trade group, said in early October. The “vast majority” of businesses hadn’t yet filed a report, “meaning millions of small business owners and their employees will become de facto felons come that start of 2025,” it said.
Also notable is a quote from FinCEN, which seems to counter the longstanding assertion that only “willful” violations will be prosecuted:
“FinCEN understands this is a new requirement,” FinCEN said in an FAQ. “If you correct a mistake or omission within 90 days of the deadline for the original report, you may avoid being penalized. However, you could face civil and criminal penalties if you disregard your beneficial ownership information reporting obligations.”
So how is FinCEN going to distinguish between inadvertent and willful violations of millions of non-compliant business owners? Like many aspects of the CTA, it’s hard to say.
The Experts Are Wrong (Part 5)
Ways & Means Chairman Jason Smith recently told reporters that Section 199A permanence is at the top of his priority list. Yet some in the DC Tax Community continue to crusade against this provision that directly benefits the vast majority of businesses in this country.
A good example is a recent Tax Notes panel on the 2025 tax outlook. During a discussion on Section 199A, Bill Gale of the Brookings Institute commented:
I mean, it’s well known to be expensive, to be extremely regressive, and not to have had anywhere near the desired impact on either investment or hiring etc. It was created for equity for passthrough owners given that the corporate tax was being cut.
We previously addressed the questions of cost and economic growth here and here. In this post, we will address the question of whether 199A reduces the progressivity of the Tax Code.
Regressive? Hardly
A recent CRS report flatly states that the 199A deduction is neutral regarding progressivity — “The Section 199A deduction appears to have little effect on vertical equity, as it does not appear to diminish the progressivity of the federal income tax.” As the report explains:
The deduction has little effect on vertical tax equity. In theory, it reduces statutory marginal tax rates by the same factor (20%), leaving a progressive rate structure intact for pass-through business owners.
Nonetheless, available evidence indicates that high-income taxpayers might capture much of the Section 199A deduction’s overall benefit. Such an outcome would be consistent with what is known about the income distribution of pass-through business profits.
We put together this table to illustrate what the CRS report is talking about. As you can see, in 2019 the top 1 percent of taxpayers earned 54 percent of pass-through income and received 55 percent of the 199A deduction benefits:
This neutrality occurs despite the fact that, as a deduction, Section 199A benefits are tied to the marginal tax rate paid by the owners. The higher the rate, the higher the ultimate benefit. Given that, you’d expect the tax benefits of upper income taxpayers to exceed their income shares, but the table above shows they are consistent with income. What gives?
The reality is that large pass-throughs get the 199A deduction, but only if they employ lots of people or make significant investments. That’s because 199A imposes so-called guardrails on large pass-through businesses so, for example, they only get the deduction up to 50 percent of the W-2 wages they pay, or a similar cap tied to capital investments. A Treasury study shows how these guardrails exclude about 40 percent of pass-through income from the 199A benefit, all from business owners making more than $400,000.
Finally, it is important to remember that Section 199A was not enacted in a vacuum – it was part of a package that included many tax hikes. These included the caps on SALT deductions, excess loss deductions, interest deductions, amortization of R&E expenses, etc. Many of these provisions are permanent and all of them raise taxes on pass-through businesses, primarily larger ones.
For context, consider this table from Tax Notes. It shows the SALT cap will impose around a $50 billion tax hike on taxpayers making more than $1 million next year. That amount is almost the entire tax benefit of the Section 199A deduction. Obviously, pass-through owners make up just a subset of all taxpayers, but if the concern is progressivity, it’s clear the combined individual and pass-through provisions in the TCJA made the Tax Code more progressive, not less.
The same cannot be said for the corporate rate cuts. Critics argue that the TCJA primarily benefited wealthy taxpayers, but that is mostly due to the corporate rate cuts. This table from the Tax Policy Center shows that as income rises, so does the benefit from the corporate rate cuts.
Corporate rate cuts don’t benefit pass-through business owners, but it doesn’t stop the critics from blaming 199A anyway.
Where the Pass-Through Jobs Are
So the experts are wrong again. The Section 199A deduction does not reduce the progressivity of the Tax Code. That’s good for the parts of the country that spoke loudest last month. Those areas rely heavily on pass-through businesses for their jobs and growth (all that green), and those are the areas that have the most at stake when Congress tackles the TCJA sunsets next year.
Ultimately, making Section 199A permanent is not just about fairness and parity — it’s about safeguarding the economic vitality of the communities that rely on pass-throughs. These businesses are the backbone of the American economy, particularly in regions that have been left behind in the modern economic landscape. Section 199A ensures these job creators have the resources to reinvest in their operations, hire more workers, and contribute to local economies.
As Congress looks ahead to addressing the TCJA sunsets, it should recognize the critical role Section 199A plays in sustaining economic opportunity for literally every community across the country.
Latest on CTA Injunction and a Legislated Delay
The national injunction on CTA filing imposed by the Eastern District of Texas Court Tuesday provides millions of business owners with a good possibility – but just a possibility – of permanent relief from this poorly thought-out law.
With the year-end filing deadline looming, where do things stand?
- The DOJ filed an appeal to get the injunction lifted last Thursday, December 5th. No word on when the 5th Circuit might rule. Will it come before or after the end of the year?
- FinCEN meanwhile posted a notice on its BOI landing page that it would comply with the court order and that covered entities are, for the moment, under no obligation to complete their CTA filings. The site is still open if you want to file “voluntarily.”
- Talks with leadership and the banking committees have been moving forward, and it appears a one-year delay of the filing deadline – providing much needed clarity – is a very real possibility.
- FinCEN reports that less than 10 million of the 36 million covered entities have filed as of the beginning of December with only 1 million new filings taking place each week. That’s sure to slow as a result of the court order, suggesting something in the range of 20 million small businesses will be out of compliance at the end of the year if filing resumes.
In practical terms, this means many businesses who have yet to file are hitting the pause button for now but continuing to prepare in the event 1) the injunction gets lifted and 2) the legislative delay fails to develop.
In terms of likelihood, we believe it is unlikely the 5th Circuit stays the injunction this close to the filing deadline, particularly with so many covered businesses not in compliance yet. Meanwhile, the odds of legislated relief appear to rise by the day. So hope for the best but prepare for the worst? A clear statement by Congress or the 5th Circuit really would be welcome right now.
Court Decision
On Tuesday, the Federal District Court issued an 80-page preliminary ruling and injunction in favor of NFIB and the business community as a whole. Similar to an earlier court decision last March in Alabama, the court found the CTA exceeded Congress’ authority under the Constitution:
At its most rudimentary level, the CTA regulates companies that are registered to do business under a State’s laws and requires those companies to report their ownership, including detailed, personal information about their owners, to the Federal Government on pain of severe penalties. Though seemingly benign, this federal mandate marks a drastic two-fold departure from history. First, it represents a Federal attempt to monitor companies created under state law—a matter our federalist system has left almost exclusively to the several States. Second, the CTA ends a feature of corporate formation as designed by various States—anonymity. For good reason, Plaintiffs fear this flanking, quasi-Orwellian statute and its implications on our dual system of government. As a result, Plaintiffs contend that the CTA violates the promises our Constitution makes to the People and the States. Despite attempting to reconcile the CTA with the Constitution at every turn, the Government is unable to provide the Court with any tenable theory that the CTA falls within Congress’s power. And even in the face of the deference the Court must give Congress, the CTA appears likely unconstitutional. Accordingly, the CTA and its Implementing Regulations must be enjoined.
DOJ Appeal
The DOJ appealed the injunction on Thursday. Here’s Forbes on the process from here:
On December 5, 2024, the Financial Crimes Enforcement Network (FinCEN) filed an appeal against the nationwide preliminary injunction issued by the U.S. District Court for the Eastern District of Texas, which had halted enforcement of the Corporate Transparency Act (CTA). The appeal challenges the court’s decision that the CTA likely exceeds Congress’s constitutional authority.
The appellate court’s response to FinCEN’s appeal is pending. The court is expected to move swiftly to either uphold the injunction, modify its scope, or overturn it, potentially reinstating the CTA’s reporting requirements of the December 31, 2024 deadline. Given this uncertainty, we recommend that businesses remain prepared to comply with the CTA should the injunction be lifted. This includes gathering necessary beneficial ownership information and staying informed about legal developments.
What counts as “swiftly” is unclear, but it would be nice to have some clarity in the next week. The more time that goes by, the more difficult it will be for all those “paused” businesses to resume their filing plans on a timely basis.
FinCEN Notice
On Thursday or Friday, FinCEN posted a statement indicating it would abide by the injunction but continue to accept voluntary submissions. The key paragraph:
While this litigation is ongoing, FinCEN will comply with the order issued by the U.S. District Court for the Eastern District of Texas for as long as it remains in effect. Therefore, reporting companies are not currently required to file their beneficial ownership information with FinCEN and will not be subject to liability if they fail to do so while the preliminary injunction remains in effect. Nevertheless, reporting companies may continue to voluntarily submit beneficial ownership information reports.
Legislative Relief
As S-Corp readers know, we have been pressing Congress to delay the filing deadline to 1) give business owners more time to learn about the new law (many still don’t know it exists) and 2) give the courts time to review the law and make a final determination whether it’s constitutional. Spoiler Alert: It’s not.
Word from the Hill is a one-year delay is under consideration and has a chance to catch a ride on the year-end spending bill. This would be a massively helpful development as, noted above, only about one-in-four covered businesses (9 million) have filed to date. That’s a lot of felons.
Bottom Line: This country survived for 250 years without a CTA. It can survive a few months more.
CTA Struck Down by Texas Court!
For the Main Street business community, it looks like Christmas has come early. With less than a month to go before the Corporate Transparency Act’s year-end filing deadline, a federal court today issued a nationwide injunction that halts enforcement of the new reporting regime. It’s a massive win for the more than 33 million businesses who are currently subject to the onerous disclosure rules, many of which had no idea they could be starting the new year as de facto felons.
That positive outcome was secured by our good friends at the National Federation of Independent Business who, alongside several of their small business members, filed their constitutional challenge back in May.
As S-Corp readers are well aware, the CTA took effect this year and requires small businesses and other covered entities to report – and regularly update – the personal information of their owners and managers to the Financial Crimes Enforcement Network (FinCEN) at the Treasury Department. Put simply, the CTA is the largest data grab in history outside the Tax Code, and saddles law-abiding business owners with compliance headaches and criminal penalties while doing little or nothing to combat illicit activity.
S-Corp and its allies have been fighting the CTA for years, including calling out the ill-conceived law back in 2020, backing the legal efforts kicked off by the National Small Business Association (NSBA), organizing numerous industry support letters to push for delay and repeal in Congress, and otherwise educating lawmakers and various other stakeholders along the way.
Back to the Texas court ruling, the key passage reads as follows:
Having determined that Plaintiffs have carried their burden, the Court GRANTS Plaintiff’s Motion for a Preliminary Injunction. Therefore, the CTA, 31 U.S.C. § 5336 is hereby enjoined. Enforcement of the Reporting Rule, 31 C.F.R. 1010.380 is also hereby enjoined, and the compliance deadline is stayed under § 705 of the APA. Neither may be enforced, and reporting companies need not comply with the CTA’s January 1, 2025, BOI reporting deadline pending further order of the Court.
And here’s NFIB’s press release applauding the decision:
“This ruling is a huge victory for small businesses nationwide, and just in time” said Beth Milito, Executive Director of NFIB’s Small Business Legal Center. “For many Main Street small businesses, they were a mere four weeks away from the deadline to file their information in accordance with the CTA. The BOI reporting requirements are a harmful invasion of small business owners’ privacy and a misuse of their valuable time. Thankfully, the Court agreed and granted a preliminary injunction, giving small business owners a reprieve from this burdensome rule.”
The big question here is how FinCEN will respond. The agency pressed forward with enforcement even after a successful ruling in NSBA v Yellen and ultimately appealed the decision, which remains pending in the 11th Circuit. So while affected entities are off the hook for the year-end filing deadline, that’s all subject to change as the case moves through the courts – meaning we’ll still need to work with Congress and the new administration on a permanent fix.
That said, today’s ruling is a huge win for Main Street and comes as welcome relief to countless businesses across the country!
CTA Update | December 3, 2024
Notable Developments
- Senator Lankford pushes delay via NDAA
- CTA enforcement under Trump administration?
- Oregon plaintiffs file suit
- Op-eds highlight CTA’s fatal flaws
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Legislative Update
Senator James Lankford (R-OK), a cosponsor of the Senate’s version of the CTA delay bill that overwhelmingly passed the House last year, is doubling down on his efforts to advance relief for the Main Street business community. As he posted on X.com on Monday:
The Beneficial Ownership Information reporting requirements (aka a new registry) for small business owners are unclear and overly broad. They are due on January 1, 2025, but I am pushing for a 1-year delay.
As we’ve written previously, the CTA originally was enacted as part of the FY2021 NDAA, so it makes sense to initiate a delay via this year’s version. It’s also worth noting that while the CTA was snuck into the NDAA at the time, S-Corp and its allies are being open and transparent about their efforts now.
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Regulatory Update
Per the latest post from our friend and ally Carol Roth, there’s still hope that the incoming Trump administration might quash CTA enforcement:
The belief from my contacts is that even if none of that happens prior to the deadline, Trump won’t enforce penalties, especially with the large number of non-complying entities expected. However, as that is not guaranteed, you have to decide on which is a bigger risk—risking the government coming after you for the non-compliance fines or handing your information over to them.
My guess is if something does happen before year end, it will be at the 11th hour, not giving us a lot of time to make a decision.
As we’ve long maintained, the ultimate goal here is to quash the CTA’s reporting requirements before year end and prevent the federal government from establishing its database. Would a public announcement from Trump officials that they won’t enforce the CTA be enough to offer de facto amnesty to tens of millions of affected entities? Many of the legal eagles we’ve spoken to seem to think so, but it remains an open question.
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Legal Update
On November 22nd a group of small business owners appealed an Oregon court’s ruling that struck down their CTA challenge. The suit was initially filed in June but was rebuffed in September. The appeal is backed by the Center for Individual Rights, whose press release reads:
Although it was enacted to combat financial crime, the law exempts large corporate entities and financial firms, leaving mostly small businesses and some non-profit organizations to comply. Failure to comply with CTA reporting can result in uncapped and unlimited daily civil penalties of up to $500 per day, and criminal sanctions of up to $10,000 in fines and up to two years’ imprisonment, or both.
“I can’t understand why the CTA exempts large corporations but threatens small business owners with criminal penalties unless we give up sensitive information to the federal government without any lawful purpose,” said Lisa Ledson, one of the plaintiffs and owner of an Oregon-based health care firm. Ledson stated that under Oregon state rules related to the nursing profession, she would have to self-report any sanctions made against her by FinCEN to the nursing board, which would put her at risk of losing her nursing license.”
As a reminder, there are now at least ten 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 (appealed): Firestone v Yellen (6/27/2024)
- Utah: Taylor v Yellen (7/29/2024)
- Virginia: Community Associations Institute v. Janet Yellen (9/10/2024)
- Texas: Association of American Physicians & Surgeons et al v Yellen (10/28/2024)
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Compliance Update
Here’s Carol Roth again with an excellent piece that spells out the regulatory nightmare that tens of millions of law-abiding small business owners are headed towards, along with a call to action:
Despite at least 10 pending lawsuits challenging the rule’s constitutionality, including one where a federal district court declared it unconstitutional, Congress has not taken definitive action. Multiple delay bills have been introduced in both the House and Senate, yet none have moved forward. A recent report estimated compliance rates at just 10%, meaning millions of small businesses could face penalties under an unconstitutional rule.
Small-business owners are not financial criminals. They are the backbone of the American economy and deserve better treatment. This rule unfairly targets them, and Congress or President-elect Trump must take immediate action to protect these businesses.
And a recent op-ed in Barrons reinforces Roth’s point regarding compliance:
But the low compliance rate so late in the year reflects problems with the general way the CTA was written, says Alan Granwell, an attorney at Holland & Knight. While many owners may not be aware of the new rules, even those who are and have best intentions to file are stumped by myriad questions, he says.
“We’re getting calls left, right and sideways about this stuff,” Granwell says. “You have different questions arise depending on whether you’re in private equity, venture, construction, real estate—each has its own issues.”
Some business owners may be holding off on filing, hoping that the CTA will be overturned in the courts or that Republicans, who typically favor easing regulations and less oversight on businesses, will cancel the CTA requirements next year now that they have a majority in the Senate and the House.
… “This just came up—one owner is in an elderly home and doesn’t have the required documents,” Granwell says. It’s unlikely identification can be applied for and granted by the year-end deadline.
Finally, small business owner Gary James, president of Dynalab in Reynoldsburg, Ohio, has a great piece in the Columbus Dispatch:
Reforming the regulatory state is also shaping up to be a priority of the incoming White House. Given that the onslaught of new government regulations implemented under the Biden administration has cost businesses upwards of $1.4 trillion, the pruning is sorely needed. The Corporate Transparency Act is a good example of such draconian government overreach and needs to be rescinded.
Large corporations have the luxury of propping up legal departments to navigate regulatory mazes and paperwork. Small businesses, on the other hand, do not. In fact, the average per employee cost of regulatory compliance for manufacturing businesses with fewer than 50 employees is double that of large firms in the same sector.
Once again, the CTA is going to turn countless small business owners into felons come the end of the year, many of whom have no idea why. It’s time to enact relief now, and better yet put this ill-advised information dragnet to bed once and for all.