Corporate Transparency Act: What is the Large Operating Company Exemption?
The Corporate Transparency Act (CTA) is a law that requires most companies doing business in the U.S. to file a beneficial ownership report (BOI).
The CTA applies to any corporation, LLC or other entity that is formed by the filing of a document with a secretary of state. The CTA also applies to non-U.S. companies that register to do business in the U.S. by filing a document with a secretary of state.
But the CTA exempts 23 categories of companies that would otherwise be required to file beneficial ownership reports. The requirements are very specific, so if you believe your company might be exempt, you should consult an attorney.
One of the most widely-applied exemptions is called the “large operating company” exemption.
Elements of the Large Operating Company Exemption
The large operating company exemption has three requirements. To take advantage of this exemption, the company must:
1. Employ 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);
2. Have an operating presence at a physical office within the United States; and
3. Have 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.
If your company satisfies all three of these requirements, it is exempt under the large operating company exemption and does not need to file a BOI report.
The Minimum Employee Requirement
The minimum employee requirement of the large operating company can be tricky. For a company to satisfy this first prong of the test, the company must have “more than 20 full time employees in the U.S.” Twenty employees is not enough; it must be “more than 20”.
The twenty-one or more employees must be “full time,” applying the regulatory definition quoted above. The rules for counting employees can be tricky, so you may need to consult an attorney if your company is close to the line.
It is also important to realize that you will need to monitor this requirement on a continuous basis. If your company was within the guidelines for the large operating company exemption on Day 1, because it satisfied all three tests, but on Day 10 the company terminates some of its employees, causing its total employee count to fall below 21 full-time employees, your company has lost the exemption on that day.
The Minimum Gross Receipts Requirement
The third prong of this CTA exemption test relates to the company’s gross receipts from U.S. sources reflected on its most recent tax return.
Importantly, this is a test on U.S. source income. If your company had more than $5 million on last year’s tax return, but would fall below $5 million if gross receipts or sales from sources outside the United States were excluded, then your company does not satisfy this requirement.
It is also important to note how your company can satisfy, or cease to satisfy, this requirement over time. Consider this example:
Example:
ACME Corporation is formed on April 1, 2024. It is immediately successful and generates more than $10 million in gross receipts in its first month of operations. Does ACME Corporation satisfy the requirements of the large operating company exemption during 2024?
Answer: No. The gross receipts test measures the gross receipts from U.S. sources shown on the prior year’s tax return. Since ACME Corporation was formed during 2024, it will not file an initial federal income tax return until 2025. Consequently, it will not be eligible for the large operating company exemption until after it files its tax return (showing at least the minimum gross receipts) for the first time.
What Happens if Your Company Loses its Exempt Status?
If your company was exempt under the large operating company exemption, but loses its exempt status, it will need to file an initial BOI report within 30 calendar days after the date it loses its exempt status.
If your company loses its exempt status because the number of full-time employees in the U.S. falls below the minimum level, the exemption is lost on the date when the number of full time employees fell below the threshold. The initial BOI report will be due 30 days after that.
If your company loses its exempt status because it files a tax return demonstrating less than the minimum gross receipts, the exemption is lost on the date when the tax return is filed. The initial BOI report will be due 30 days after that.
What to Do if Your Company is Not Exempt?
If your company is not exempt from the Corporate Transparency Act, it will need to file a BOI report with FinCEN – the U.S. Financial Crimes Enforcement Network. Many companies are using commercial filing services, like FinCEN Report, to help them keep their confidential information secure and to file their BOI reports online.
If your company was formed on or after January 1, 2024, you will need to file your initial BOI report within 90 calendar days after the date of its formation. If your company was formed before 2024, you will need to file your initial BOI report no later than January 1, 2025.
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