Are Small Businesses Exempt From The Corporate Transparency Act?

There are 23 separate exemptions from the CTA's beneficial ownership reporting requirement. The exemptions are listed in order in FinCEN's Final Rule at 31 CFR 1010.380 and take effect on January 1, 2024.

CTA Exemptions Generally

In general, the CTA exempts companies that already report their beneficial ownership to the U.S. government under a separate legal framework. FinCEN's Final Rule addresses each exemption separately in subsection 1010.380(c)(2).

Exemption Number 21 - Large operating company

Subsection 1010.380(c)(2)(xxi) of the Final Rule exempts:

(xxi) Large operating company. Any entity that:

(A) Employs more than 20 full time employees in the United States, with "full time employee in the United States" having the meaning provided in 26 CFR 54.4980H-1(a) and 54.4980H-3, except that the term "United States" as used in 26 CFR 54.4980H-1(a) and 54.4980H-3 has the meaning provided in § 1010.100(hhh);

(B) Has an operating presence at a physical office within the United States; and

(C) Filed a Federal income tax or information return in the United States for the previous year demonstrating more than $5,000,000 in gross receipts or sales, as reported as gross receipts or sales (net of returns and allowances) on the entity's IRS Form 1120, consolidated IRS Form 1120, IRS Form 1120-S, IRS Form 1065, or other applicable IRS form, excluding gross receipts or sales from sources outside the United States, as determined under Federal income tax principles. For an entity that is part of an affiliated group of corporations within the meaning of 26 U.S.C. 1504 that filed a consolidated return, the applicable amount shall be the amount reported on the consolidated return for such group.

The exemption in subsection (c)(2)(xxi) tracks language in the Corporate Transparency Act and reflects a policy choice to exempt operating companies with a physical presence, with more than the requisite number of employees and the requisite level of revenue, on the basis that such operating companies are unlikely to be engaged in money laundering. Commenters had questioned the merits of those assumptions but FinCEN noted, in its discussion on the exemption in subsection (c)(2)(xxi), that the elements of the exemption were established by statute and that FinCEN therefore lacked the authority to change those elements.

An entity that wants to avail itself of this exemption will need to track each of the three requirements carefully.

The first prong of the test requires that the entity have "more than 20 full time employees in the United States" as defined in 26 CFR 54.4980H-1(a) and 54.4980H-3, except that the term "United States" as used in 26 CFR 54.4980H-1(a) and 54.4980H-3 has the meaning provided in § 1010.100(hhh);

The regulation referenced in this first prong defines "employee" as "an individual who is an employee under the common-law standard. See § 31.3401(c)-1(b)." The regulation explicitly excludes from the definition, "a leased employee (as defined in section 414(n)(2)), a sole proprietor, a partner in a partnership, a 2-percent S corporation shareholder, or a worker described in section 3508."

The regulation further defines "full time employee" as follows:

(i) In general. The term full-time employee means, with respect to a calendar month, an employee who is employed an average of at least 30 hours of service per week with an employer. For rules on the determination of whether an employee is a full-time employee, including a description of the look-back measurement method and the monthly measurement method, see § 54.4980H-3. The look-back measurement method for identifying full-time employees is available only for purposes of determining and computing liability under section 4980H and not for the purpose of determining status as an applicable large employer under § 54.4980H-2.

(ii) Monthly equivalency. Except as otherwise provided in paragraph (a)(21)(iii) of this section, 130 hours of service in a calendar month is treated as the monthly equivalent of at least 30 hours of service per week, and this 130 hours of service monthly equivalency applies for both the look-back measurement method and the monthly measurement method for determining full-time employee status.

(iii) Determination of full-time employee status using weekly rule under the monthly measurement method. Under the optional weekly rule set forth in § 54.4980H-3(c)(3), full-time employee status for certain calendar months is based on hours of service over four weekly periods and for certain other calendar months is based on hours of service over five weekly periods. With respect to a month with four weekly periods, an employee with at least 120 hours of service is a full-time employee, and with respect to a month with five weekly periods, an employee with at least 150 hours of service is a full-time employee. For purposes of this rule, the seven continuous calendar days that constitute a week (for example Sunday through Saturday) must be consistently applied for all calendar months of the calendar year.

The second prong requires that the entity have "an operating presence at a physical office within the United States."

The term "operating presence at a physical office within the United States" is defined Section 1010.380(f)(6) to mean "that an entity regularly conducts its business at a physical location in the United States that the entity owns or leases and that is physically distinct from the place of business of any other unaffiliated entity."

Importantly, in an era when many people work from home, such a "home office" would not count as an "operating presence."

The third prong is that the entity has filed a federal income tax return "for the previous year demonstrating more than $5,000,000 in gross receipts or sales, as reported . . . on the entity's IRS Form 1120, consolidated IRS Form 1120, IRS Form 1120-S, IRS Form 1065, or other applicable IRS form, excluding gross receipts or sales from sources outside the United States, as determined under Federal income tax principles."