How does the Corporate Transparency Act Affect Inactive Entities?

With autumn here, the January 1, 2025, initial filing deadline for the Corporate Transparency Act (CTA) is rapidly approaching. While we’ve previously covered the overall scope of this legislation, the CTA also includes exemptions relieving certain small business owners of the obligation to file if they fit within specific criteria. In this instance, we are exploring how the CTA defines those entities falling under the “inactive entity” exemption.

Though it may be convenient to assume that any dormant entity you have formed over the years is “inactive” and thus exempt, the reality is far more complicated. To simplify this determination, we have assembled a list detailing how the CTA defines an “inactive entity.” Please note that an entity must meet all of these criteria to qualify for the exemption.

Under the CTA, an entity is considered to be inactive if it:

1. was in existence on or before January 1, 2020;
2. is not engaged in active business;
3. is not owned by a foreign person, whether directly or indirectly, wholly or partially;
4. has not experienced any change in ownership in the preceding 12-month period;
5. has not sent or received any funds in an amount greater than $1,000, either directly or through any financial account in which the entity or any affiliate of the entity had an interest, in the preceding 12-month period; and
6. does not otherwise hold any kind or type of assets, whether in the United States or abroad, including any ownership interest in any corporation, limited liability company, or other similar entity.

If you have tried to find an answer on your own by reviewing the CTA, you may have noticed two things: (i) the criteria for this “inactive entity” exemption differs from what we have outlined above; and (ii) the January 1, 2025, deadline is not mentioned in the bill. The answer to both inconsistencies lies in a final rule issued by FinCEN on September 30, 2022. This lengthy document made numerous changes to the CTA as it was initially drafted, including the establishment of the January 1, 2025 deadline and the additional criteria added to this “inactive entity” exemption.

Fortunately, there is no need for you to navigate through extensive legislation and administrative documents; we have compiled the most up-to-date criteria available and continue to post updates as matters evolve.

With the deadline getting closer each day, it is imperative that you take immediate steps to verify whether any dormant entities you have an interest in truly meet the CTA’s definition of inactive. With penalties ranging from $500 for each day of non-compliance to up to two years imprisonment, this is not a matter to take lightly. If you have any questions as to the eligibility of any of your entities under this exemption or any questions about CTA filings in general, contact your Gross McGinley attorney to schedule a time to address this critical issue.