Second Take on the Corporate Transparency Act
By Richard S. Ekimoto, Esq.
Last week, I posted information about the Corporate Transparency Act. The Corporate Transparency Act (“CTA”)1 is a federal law adopted in 2021 which requires Reporting Companies to file information with FinCen about its Beneficial Owners. In my post, I stated that most of the exemptions for Reporting Companies would probably not apply to community associations.
I wanted to provide you with a second take from a good friend of mine, Gary Porter. Gary is probably the most well-know and knowledgeable CPA on the taxation of community associations in the country. I’ve worked with Gary when he was President of CAI National and I was Chair of the Government and Public Affairs Council. Interestingly, we worked on issues involving Internal Revenue Code Section 528 which involves Gary’s second take of the CTA.
A homeowners association (as defined in subsection (c)) shall be subject to taxation under this subtitle only to the extent provided in this section. A homeowners association shall be considered an organization exempt from income taxes for the purpose of any law which refers to organizations exempt from income taxes.26 U.S.C. §528(a).
To explain this provision further, IRC 528 allows community associations that qualify to file an IRS Form 1120-H rather than IRS Form 1120. The practical differences between the two filings are that under IRS Form 1120-H, a community association can be exempt from income from most membership assessments, but pays income taxes on non-exempt income at the 30% tax rate. In contrast, community associations that file under IRS Form 1120, would pay a graduated income tax rate, but membership assessments would not be exempt. Community associations should consult with their own CPA about their tax filings because not all community associations qualify to file IRS Form 1120-H.
Gary has suggested that there is a possible argument that IRC 528(a) provides community associations an argument that it is not a Reporting Company under the nonprofit exemption. While that is a potential argument, I have a concern that many community associations may not qualify under the nonprofit exemption.
The relevant part of the nonprofit exemption exempts from a Reporting Company an:
31 USC §5336(a)(11)(B)(xix)(I).
organization that is described in section 501(c) of the Internal Revenue Code of 1986 (determined without regard to section 508(a) of such Code) and exempt from tax under section 501(a) of such Code, except that in the case of any such organization that loses an exemption from tax, such organization shall be considered to be continued to be described in this subclause for the 180-day period beginning on the date of the loss of such tax-exempt status [Emphasis added.]
Since the statute expressly requires that the organization be exempt from tax under IRC 501(a), FinCen could argue that a community association that is tax exempt under another section of the Internal Revenue Code does not qualify under the exemption. For that reason, we continue to take the position that community associations should err on the side of caution when determining whether they are a Reporting Company. Still, for those community associations that do qualify as tax exempt under IRC 501(a), will be exempt from the Beneficial Ownership Information Reporting requirements. However, as I noted previously, very few community associations are exempt under that statute.
It does make sense, however, to wait until much later in the year to file a Beneficial Ownership Information Report if you can do so legally. Those community associations that were in existence before January 1, 2024 do not have a legal requirement to file the report until December 31, 2024. It’s likely that throughout the year, FinCen will provide further guidance about the filing requirements. Moreover, there is legislation being considered in congress to amend the law.