Taxlink

Big Brother is watching! Every time you turn around, there is a new IRS form or government reporting obligation. Some of these are meant to prevent crimes; others are aimed at curbing tax abuse. Many questions about reporting obligations have come up during tax season, so I wanted to briefly touch upon some of them.

The Corporate Transparency Act (CTA) was enacted in 2021, and reporting started in 2024. The CTA requires corporations, partnerships and other entities registered to do business in the United States to report information on beneficial owners. A beneficial owner is an individual who ultimately controls the entity. The information is reported to the Financial Crimes Enforcement Network (FinCEN), which is part of the U.S. Department of the Treasury. The information can be disclosed to government authorities and financial institutions.

Who is a beneficial owner? Someone who directly or indirectly exercises "substantial control" over the reporting company or directly or indirectly controls 25% or more of the "ownership interests" of the reporting company.

The most common exception to reporting is the large operating company exemption. To meet the exemption, an entity must have at least 20 full-time employees, $5 million in gross receipts or sales, and a physical presence in the United States. Other exceptions include 501(c)(3), certain regulated financial companies and accounting firms.

If you don't qualify for an exemption, you must file initial reports on or before Jan. 1, 2025. If you form a new entity in 2024, you have 90 days from registration to file the report. If you don't, you are subject to a civil penalty of $500 per day and criminal penalties, including a $10,000 fine and two years in prison.

Another filing requirement is IRS form 7203. This form is meant to establish S corporation stock basis. It is submitted with the S-corp owner's tax return. S-corp owners must include the 7203 if they sell stock during the year, receive a payout from the S-corp, receive loan paybacks from the S-corp, or the shareholder claims a loss-related deduction.

Form 7203 is meant to track basis and to figure limitations on the shareholder's level. Tracking S-corp basis is very important and something you should do from the inception. If you do not track basis and receive a dividend distribution from the S-corp, you can't be sure it's a tax-free distribution. Another reason for the form is if you sell your S-corp stock, you will need to know your basis to properly determine your gain. Finally, if the S-corp has a loss, it would be limited to the shareholder's basis and the rest suspended.

I'd recommend that you follow the reporting requirements. A little time and effort can prevent issues down the road.

**

DTN Tax Columnist Rod Mauszycki, J.D., MBT, is a tax principal with CLA (CliftonLarsonAllen) in Minneapolis, Minnesota. Read Rod's "Ask the Taxman" column at https://www.dtnpf.com/…. You may email Rod at taxman@dtn.com.

(c) Copyright 2024 DTN, LLC. All rights reserved.