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Corporate Transparency Act ruled unconstitutional

by Jay Stone
News Reporter

Posted on March 5, 2024 10:04 PM

                                                                                                                                                                                                        iStock photo

On March 1, a federal judge ruled the Corporate Transparency Act (CTA) of 2021 unconstitutional, blocking the federal government from enforcing the regulation that went into effect Jan. 1. 

Judge Liles Burke of the U.S. District Court for the Northern District of Alabama found the CTA is not justified under powers the U.S. Constitution gives Congress. 

Burke noted, “It would be a ‘substantial expansion of federal authority’ to permit Congress to bring its taxing power to bear just by collecting ‘useful’ data and allowing tax-enforcement officials access to that data.”

The National Small Business Association (NSBA), which brought the suit against the U.S. Treasury Department, said the CTA database is “ripe for data security issues and confusion which could saddle small-business owners with hefty penalties or even jail time.”

It is likely that the district judge’s ruling will be appealed but for the time being small businesses do not have to comply with the CTA. 

“The CTA has from the very beginning been poor policy that unfairly targets America’s small businesses,” said NSBA President and CEO Todd McCracken. “This ruling justifies the concerns of millions of American businesses about how the CTA is not only a bureaucratic overreach, but a Constitutional infringement.” 

The ruling can be read here.

CTA explained

The CTA would have required small businesses, including many farmers, to file a Beneficial Ownership Information (BOI) report identifying anyone with a 25% or greater ownership stake in the business or anyone who has decision-making or operational control over the business. 

There would have been exemptions for business entities already under extensive regulatory requirements, but many farms may not have qualified, National Agricultural Law Center (NALC) Staff Attorney Micah Brown Brown said. 

“A lot of the small businesses and ag entities are likely not going to meet any exceptions, so they would be required to report this,” Brown said. 

An ag business would be exempt from the BOI reporting requirement if it qualifies as a “large operating company.” 

The U.S. Treasury’s Financial Crimes Enforcement Network (FinCEN) defines a large operating company as one that meets all of the following criteria: Employs more than 20 people full time in the U.S.; has a physical operating location in the U.S.; filed a federal income tax return or information return in the U. S. for the previous year; $5 million in gross receipts or sales was reported on IRS Form 1120, consolidated IRS Form 1120, IRS Form 1120-S, IRS Form 1065, or other applicable IRS form; and its gross receipts or sales from sources outside the U.S., as determined under Federal income tax principle, are excluded from the entity’s amount of gross receipts or sales and the amount remains greater than $5 million.

An ag business would have qualified for an exemption if it is a subsidiary of an exempt entity.

The National Agriculture Law Center is hosting a webinar about CTA March 20 from noon to 1 p.m. Visit  https://gfb.ag/ctawebinar to register or see presentation slides.