Large Operating Company and Subsidiary Exemptions Under the CTA
By: Anthony Paesano, Esq.***
The Corporate Transparency Act (CTA) is here to stay, despite voices to the contrary. As such, both lawyers and accounting practitioners should pay close heed heading into the summer of 2024. As an attorney practicing primarily in corporate governance and real estate development and construction, the most common questions coming across my desk are, “Am I exempt as a large operating company?” and “How do I deal with single purpose entities or pledgor entities in our real estate developments?” While this article addresses these issues at the surface level, it is imperative for all companies to seek guidance from their attorneys or accountants, and specialists in the growing field of CTA compliance.
Large Operating Company Exemption
An entity qualifies under this exemption, and thus does not have to report with FinCEN, if it meets each of the following three criteria:
(a) Employee Test. A large operating company must employ “more than 20 full-time employees in the United States.” In assessing whether an individual is an “employee,” FinCEN relies on 26 CFR 54.4980H-3, which states that an individual is a full-time employee if that person provides at last 30 hours/week of services, or 130 hours/month, to the employer, but what is not clear in the guidance is the determination date for such calculation, i.e., at the end of the calendar year, time of reporting, or at the end of the month just prior to reporting? Employers are cautioned not to consolidate employee headcounts across affiliated entities, irrespective of whether such entities are sister companies, members of a consolidated group or where the entity is wholly-owned. Entities providing managed services to reporting companies, such as CTA Compliance Advisors (www.goctac.com) has advised in favor of the “out of an abundance of caution” approach in determining the number of employees, at any given time, for the prior year, consistent with the Gross Income Test, as set forth below.
(b) Physical Presence Test. A large reporting company needs to operate at a “…physical office within the United States” which is either owned or leased, and distinct from the place of business of any other affiliate. It would not surprise the author if practitioners representing companies that would otherwise fall within this exemption to enter into written lease or sub-lease agreements with its own parent or subsidiary entities; however, as with any government regulation, further guidance eliminating this “lease loophole” is undoubtedly around the corner.
(c) Gross Income Test. For those reporting in 2024 (which some estimates put at over 33 million companies), you are to look back in 2023 at your IRS Form 1120, consolidated IRS Form 1120, IRS Form 1120-S, IRS Form 1065, or other IRS form applicable to your business, in determining whether you reported on a timely Federal income tax or information return whether your company pulled in $5,000,000 or more of gross receipts or sales, excluding any receipts or sales from sources outside the United States (as determined by the IRC). If you are part of a consolidated group filing a single consolidated return, you may aggregate its gross income for purposes of meeting this test (but be mindful of limitations for disregarded entities not filing separate returns – perhaps this is the topic of future articles).
Subsidiary Exemption
Let’s assume you are the sponsor of a real estate development and due to lending requirements, you need to have the property titled to a bankruptcy remote, single purpose entity, or “SPE.” A “single purpose entity” (“SPE”) is an entity, usually a limited liability company in the context of a real estate transaction, created by a parent company to isolate financial risk and provide increased security to any legal entity. The SPE’s legal status as a separate company makes its obligations separate from the parent company, even if the parent company goes bankrupt, and therefore insulates the lenders collateral from potential troubles of the parent company.
Do these entities need to report beneficial owners? An understanding of the “subsidiary exemption” is required.
For the SPE and Intermediary SPE the Subsidiary Exemption would apply since they are both entities “…whose ownership interests are controlled or wholly owned, directly or indirectly, by one or more entities…” However, this exemption would not apply if the subsidiary is a money transmitting or money services business, a pooled investment vehicle, an entity assisting a tax-exempt entity or an inactive entity. The FinCEN FAQ on the topic clarifies that “partial ownership or control” does not meet the exemption:
If an exempt entity controls, some but not all, of the ownership interests of the subsidiary, the subsidiary does not qualify. To qualify, a subsidiary’s ownership interests must be fully, 100 percent owned or controlled by an exempt entity.
A subsidiary whose ownership interests are controlled or wholly owned, directly or indirectly, by certain exempt entities is exempt from the BOI reporting requirements. In this context, control of ownership interests means that the exempt entity entirely controls all of the ownership interests in the reporting company, in the same way that an exempt entity must wholly own all of a subsidiary’s ownership interests for the exemption to apply.
As with any legal analysis, the answer is usually somewhere in the gray and thus it is imperative to review your corporate structure in its entirety in assessing ownership and control because those determinations cannot be made in a vacuum. A review of your corporate structure vis-à-vis the most recent FAQs and Small Entity Compliance Guide published by FinCEN is strongly advised when it comes to determining your eligibility under these narrow exemptions (plus the other 21).
***Anthony Paesano is a principal at Paesano Akkashian, PC in Bloomfield Hills, Michigan, a full-service business transaction and litigation Firm. Mr. Paesano practices in the areas of corporate governance, real estate financing, business transactions, and securities, and is a principal of CTA Compliance Advisors (www.goctac.com), a SaaS and managed services consultant advising attorneys and accountants on CTA reporting and compliance.
