Under the federal Corporate Transparency Act (“CTA”), entities such as corporations and limited liability companies must annually report business ownership information to the Department of Treasury's Financial Crimes Enforcement Network (“FinCEN”). Entities failing to comply can face harsh consequences, including daily civil penalties of $500, criminal penalties of up to $10,000, and up to 24 months in prison for “beneficial owners.” The January 1, 2025, initial deadline for reporting is swiftly approaching.
With limited exceptions, community associations have no express exemption from the law's reporting requirements. While the law's application to community associations is currently being challenged in court, it is unlikely that any judgment, order, legislative amendment, or regulation will exempt community associations from the CTA before the January 1, 2025 reporting deadline.
On March 1, 2024, in the case of National Small Business United dba the National Small Business Association v. Janet Yellen, a U.S. District Court in Alabama issued an opinion finding that the CTA is unconstitutional because it exceeds the Constitution's limits on Congress' power. As a result, the District Court's order prevented any agency or employee acting on behalf of the United States from enforcing the CTA against the National Small Business Association (“NSBA”) and its members. The injunction issued does not apply nationally and was limited to the parties in the lawsuit. Therefore, it does not decide whether the CTA is viable nationwide.
On March 11, 2024, the Justice Department, on behalf of the Department of the Treasury, appealed the decision to the U.S. Court of Appeals for the Eleventh Circuit. FinCEN issued a public notice stating that it would comply with the District Court's order as to the individuals and entities subject to the court's injunction but would otherwise continue to implement the CTA. FinCEN's notice emphasized that “reporting companies are still required to comply with the law and file beneficial ownership reports as provided in FinCEN's regulations.” Unless Congress amends it, the CTA's viability will be determined by the ongoing appeal and lawsuits pending in other courts throughout the country, including one filed by the Community Associations Institute (“CAI”) in the U.S. District Court for the Eastern District of Virginia on September 10, 2024.
CAI's lawsuit argues, among other things, that community associations are nonprofit organizations under Section 528 of the IRS Code and should therefore be exempt from the CTA's reporting requirements. The lawsuit also contends that CTA violates constitutional rights by requiring invasive personal disclosures without sufficient privacy protections or cause and by burdening protected speech and private association rights.
CAI's lawsuit asks the court to exempt community associations from CTA reporting and requests a preliminary injunction to delay the reporting requirement for community associations until the court decides the lawsuit. CAI's preliminary injunction motion is set for hearing on October 11, 2024, but there is no guaranty that the court will issue a ruling on the motion that day.
Some community associations are already exempt from reporting, including those holding an active 501(c)(4) IRS tax exemption and those with over $5 million in annual revenue and 20 or more employees. However, all other community associations should continue to assemble the information necessary to assure timely compliance with the CTA's reporting requirements by the January 1, 2025, deadline.
