Getting Ready for Corporate Transparency Act: A Guide for Painters

Welcome to the Profitable Painter Podcast. The mission of this podcast is simple: to help you navigate the financial and tax aspects of starting, running, and scaling a professional painting business. From the brushes and ladders to the spreadsheets and balance sheets, we've got you covered. But before we dive in, a quick word of caution: while we strive to provide accurate and up-to-date financial and tax information, nothing you hear on this podcast should be considered as financial advice specifically for you or your business. We're here to share general knowledge and experiences, not to replace the tailored advice you get from a professional financial advisor or tax consultant. We strongly recommend you seeking individualized advice before making any significant financial decision.

This is Daniel, the founder of Bookkeeping for Painters, and this is Richard, tax director with Bookkeeping for Painters.

What's going on, Richard? How you doing?

I'm doing pretty good, Daniel. How about yourself?

I'm just excited to talk about the subject that we have today. Super, super pumped. Really uplifting topic, I think, that I think the folks that will get a lot out of it. And yeah, I'm excited to get started.

All right.

Well, I guess most of that was sarcasm, but yeah, most of it.

Well, I definitely agree that it's an important topic. Um, it is something that our listeners definitely need to be aware of. It is a current topic. Um, I don't know how exciting or thrilled people are going to be about it, but we want to try and keep you informed, and this is definitely something that you should be aware of.

Yes. Yeah, uh, Congress passed this, uh, Corporate Transparency Act, which is going to be a lot of extra things to file for a lot of people. I would venture to say millions of people, or at least millions of extra documents to file for sure. A lot of extra time.

Yeah. If you're a small business owner, this is going to apply to you. It is going to go into effect January 1st. So we have a little bit of time to try and get prepared. But we need to be ready to act on this starting next year. And like we were saying, if you're a small business owner or if you are— and we'll go into more detail— but if you are a member of an LLC or a partner in a partnership, you're definitely going to want to be aware of this.

Yeah. Yeah. So today we'll cover what the Corporate Transparency Act is, who it applies to, what you'll need to report is at least as far as we know it now. There's still information coming out. And then some of the penalties you'll face if you fail to report. And then we'll give some next steps guidance. So on how you can prepare yourself for this.

Yeah. So just a little bit of background. Why Corporate Transparency Act? Basically, in a nutshell, the Department of the Treasury Department has a division known as the Financial Crimes Enforcement Network, better known by the acronym FinCEN. And they are tasked with the job of rooting out financial crimes like money laundering and bribery and all the different nefarious things someone might do with the business. And they feel that they need more information about small businesses. There is a lot of abuse that goes on with entities. So, you know, things like limited liability companies, you know, we've heard terms like shell corporation or maybe shelf corporation, you know, things, entities that people set up for not so great purposes. And they feel in order to combat some of these financial crimes, they need to have detailed information about companies, the people who benefit from those companies, and the people who form those companies. So that's kind of the, the motivation behind this.

Yeah, and it, uh, it's, it looks like it's going to be a pretty blunt tool. So this is a lot of, you know, even though they're looking for the needle in the haystack, the whole haystack definitely has to pay attention to this. So everyone listening to this podcast, you're probably not— you probably don't have a foreign owner or doing weird things like this, but it's still likely going to apply to you.

Yeah, I think it's fair to say that this is at least indirectly aimed at small businesses. If you look at who is exempt from this reporting, it's large businesses, government agencies, This is really going— this is really targeted at small business owners.

Yeah. So I would say the exception, the only exception that would apply to someone listening to this would be the $5 million or more in revenue with 20 employees, I think it was. So if you're— if you have, yeah, 20 full-time employees with more than $5 million in gross receipts or sales and an operating presence at a physical office within the United States, you may not have to worry about this, looks like, according to the, the FinCEN beneficial ownership information reporting FAQ that they put out in August. So, but, but besides that, if you're under $5 million in and revenue don't hit any of those requirements, it looks like this is going to apply to you.

Yeah. Yeah. Unless, unless you're very, very small, I don't believe this applies to true sole proprietors who do not have an LLC established, who are not operating under an assumed name or, or a DBA. If, if you are Richard's Painting and you are operating under your own personal name, this probably doesn't apply to you, but maybe it's just go down the list of who it does apply to. If you, if you have an LLC, regardless of how that LLC is taxed, so it could be taxed as an S corp, could be taxed as a disregarded entity. If an LLC exists, this applies to you. If you have a partnership, this applies to you. If you are being taxed as an S corp, this applies to you. If you have incorporated as an officially, you know, state-recognized corporation, this applies to you as well. So it's interesting in the, in the paperwork, it basically says any entity created by the filing of a document with a Secretary of State or any similar office under the law or a state or Indian tribe. So if you had to file paperwork to form your company, this probably applies to you. Oh, yeah.

Unless you're like a huge insurance company or a venture capitalist, apparently, and a few other like large— or was it venture capital fund advisors don't need to do this, or if you're a bank or a government entity. You don't need to worry about this. But I doubt any of those people are listening to our podcast.

Well, maybe not yet. Maybe not yet.

Yeah.

And it's interesting. So when we think of FinCEN, we generally think of like foreign entities, people who have foreign bank accounts or foreign income. This applies to domestic and foreign companies. So in case, you know, we hadn't made that clear, which we probably did, you know, just being in the United States, this, this definitely applies to you, whether you're in the— if your company is in the, in the United States or if it's foreign. So what kind of information are they looking for? Well, they want information about the company itself, and they refer to that as a reporting company. So They're going to want to know, for example, the legal name of your company. They're going to want to know if you have any trade names, such as doing business as or trading as. They're going to want to know your current street address and the principal place of business. They're going to want to know what jurisdiction you formed your company in. So an LLC would have to report, you know, which state it was formed in. And they're also going to want to know your taxpayer identification number. So that would be your EIN that you get from the IRS. If you are a sole proprietor that has an LLC and you are using your Social Security number for your taxpayer identification number, then they would want to know that. So if you don't like the idea of giving out your Social Security number, you can always apply for an EIN with the IRS and you can use that instead.

So any blood, blood test samples that they need, or what does that look like?

They send you a vial in the mail and no, no biometric data as of yet. We're just sticking with addresses and numbers for now.

Okay, that'll be next year's amendment to this.

Daniel, don't give them any ideas. I know you doubt me, but members of Congress could be listening to the Profitable Painter podcast, and we don't want to give them any ideas. Right. So that's the information about the reporting company. They're also going to want information about what they call the beneficial owners. So that's going to be you as the business owner and any partners or shareholders or members that you have in your company. If you are entitled to 25% or more of a company, then you have this reporting requirement to give information about yourself. And this is probably the one that's going to feel the most invasive, although none of them, none of these requirements are really great. But if you are a beneficial owner of a company, you are going to need to give your name, your date of birth, and your address. You're also going to need to give a unique identifying number from some kind of identification document. So that would be like a driver's license or a passport or some other kind of unique ID that is issued by a governmental authority that has a unique number on it that can be tracked. I'm going to say 99% of the time it's going to be driver's license or passport. They're probably going to want a picture of your driver's license or passport. And they're going to want to know who issued you the ID. So, you know, driver's license would be the state it was issued in. I would imagine a passport would be Secretary of State. And then finally, we have what they call the reporting agent. So this is going to be the person who helped you form your company. In some cases, this is going to be the same as the beneficial owner. So if you're a sole member in your LLC and you filed the paperwork to form your LLC, you are the reporting agent. If you hired an attorney or a CPA or, I don't know, you know, your friend down the street to form the paper, to do the paperwork for you and form the company, then they would be the reporting agents and they would also have to submit name, address, date of birth, and some kind of identifying document.

So just to recap, a lot of, a lot of information you got to submit on this thing.

Yeah, yeah. Um, it's, it's definitely going to add an administrative burden. Um, you know, it's definitely going to feel invasive for some folks. I wouldn't blame someone for kind of resisting— I shouldn't say resisting, but feeling hesitant because this is a lot of identifying personal information that has to be given out. Unfortunately, we don't really have a lot of choice in the matter. The law has been passed. It's a bipartisan law. You know, we can't really blame one political party over the other, although, although feel free to do what you'd like. But this is coming, right? We're kind of the bearers of bad news here. This is, this is what's coming in the future. So I think the biggest question on everyone's mind is, all right, fine, I got to, I got to report this. How do I do it? And that is the big unknown. All we have for information on that so far is that it will be reported electronically on FinCEN's website. We do not know what that's going to look like as of now. They have told us that there will not be a fee for doing this. So I guess that's good news.

They're not going to charge us to— when they're forcing us to report this information, so they're not going to also charge us. That's good. Good to know, right?

At least not, not as of yet.

Yeah.

So again, we don't want to give them any ideas. So unfortunately right now we have, we have a lot of smoke. We don't know how this is going to play out. We just know that is coming. And so, you know, as, as, you know, tax professionals, as accountants, we are preparing for this. That's why we want to let you know about it now, because we still have, you know, 3 months before the new year. And we want to let you know that we are working with our clients to help them understand what their obligations are going to be. And when we get the information, let them know how they can report this information.

So what are the— if someone doesn't file, what kind of penalties are we looking at for this? Okay, so I know there's going to be some penalties.

Yes, Congress has authorized some penalties. I'm going to give you the maximums. This is the worst-case scenario, but if this is not filed on time, Congress has authorized a fine of up to $500 per day for every day that your report is late, or a maximum of 2 years in prison for failing to file. I don't think that's where they're going to go right off the bat. I think those penalties are put there to help with some of these nefarious players, but it is something you want to be taking seriously. We don't, we don't want to miss out on this. Uh, that being said, if you are a business that is currently existing, you have a full year to file your initial report. So these will not— you will not be able to file until January 1st, 2024. That's the earliest you will have until December 31st, 2024 to file your initial report. So a full 12 months. However, after January 1st, if any new businesses come into existence, you form a new LLC on January 1st, you will then only have 30 days to file your report. So if you are planning on filing an LLC or buying into some kind of a business, you know, just keep in mind the timing. If it's before the end of the year, you'll have some extra time for this. If it's after the first of the year, you will have 30 days and that will become the standard moving forward, 30 days to get this in.

So every time I want to buy a new rental property and put it in an LLC, I have to do this.

Every time you form a new LLC, you will need to report. Yes. And I'm glad you mentioned that, Daniel, because that, you know, we might not think about that. We might just have a couple of rental properties in an LLC. You're going to be subject to this. It's not just, you know, active businesses, but even passive income that is being held in LLC would have to report.

All right, so what next step should we be doing right now? If, if for the listeners, what should they kind of look to do at this point?

Yeah, so like we've been saying, there's still a lot unknown, uh, right now. The most important thing you can do is be aware of it, understand what is coming we can prepare to know that this is, this is information we're going to have to file. And then keeping close contact with your accountant, your tax preparer, and see if they can help you navigate this. You know, we here at Bookkeeping for Painters are going to be helping our clients through this. We don't quite know what it's going to look like yet, but we're going to be there to support them. If you need help with this, seek that professional help to get this reported. You do not want to ignore this.

Yeah, I think, I think so. I think you're right. And this, in this case, definitely pretty serious. So. All right. Well, I'd love to hear everyone's thoughts on this topic. I'm sure there's going to be a bunch of love going out to FinCEN and the Treasury. Department on this. But yeah, I'd love to hear your thoughts. If you go to Facebook, type in Grow Your Painting Business, you can join the group and let us know what you think about the Corporate Transparency Act or any topics that you'd like us to cover in future episodes. We'd love to hear from you.

Yeah, absolutely. We look forward to seeing you in the Facebook group, and we appreciate you listening.