In new FAQs published last week, FinCEN has confirmed that most Homeowner Associations will need to file under the CTA. For the past several years, advocates for Homeowner Associations and Community Associations have been hoping that these entities would be exempt from the Corporate Transparency Act. They asked Congress to amend the CTA. They asked FinCEN for an exemption. No relief arrived. This advocacy led some Association management companies to think that they should wait until later to begin leading their Associations toward compliance. The time for hoping is over, as FinCEN has made it abundantly clear that Homeowner Associations and Community Associations are not going to be exempt from the CTA and will need to file.
Associations are Reporting Companies
Most Associations are reporting companies. They are usually formed as non-profit corporations under state law. Nearly all Associations are exempt from federal income tax under Internal Revenue Code Section 528. Because the definition of “reporting company” includes every corporation, Associations are reporting companies if they are incorporated.
Associations are Not Exempt under the Tax-Exempt Exemption
There is an exemption in the CTA for entities that are exempt from federal income taxation under Section 501(c) and some other specified sections of the Internal Revenue Code (IRC). IRC Section 528, which is the provision that provides income tax relief for Associations is not one of the specific sections covered in the CTA. As a result, almost no Associations will be exempt from the CTA under the exemption for tax-exempt entities.
No Exemption is Coming
If you were still holding out hope that FinCEN might change its mind, the FAQs that FinCEN issued on April 18 dashed those hopes for good. FinCEN has issued several new FAQs that expressly state that Associations are reporting companies that will need to file.
In new FAQ C.10. FinCEN affirmatively answers the question, “Are homeowners associations reporting companies?” Its answer is, “It depends” but the reasoning behind its answer makes clear that very few Associations will fall outside the definition. In the FAQ FinCEN explains that an Association that “was not created by the filing of a document with a secretary of state or similar office” will not be a reporting company. This means that those few Associations that are unincorporated associations under state law will be outside the scope of the definition of “reporting company.” This is a very small group, however. For years HOA lawyers have been advising Associations to use the non-profit corporate form and nearly all of them have. So, if your Association is unincorporated, it will not be required to file but incorporated Associations are reporting companies.
In the same FAQ FinCEN also made clear that it was not going to expand the non-profit exemption. It wrote that an HOA that was “designated as a 501(c)(4) social welfare organization” might fit into the exemption. The problem here, once again, is that almost no Associations are designated as social welfare organizations under IRC 501(c)(4). Because IRC Section 528 explicitly covers HOAs, nearly all HOAs have chosen to utilize the tax-exempt status provided by Section 528.
As a result, while unincorporated Associations and those designated under IRC 501(c)(4) might not have to file, every incorporated Association that has availed itself of IRC 528 will be a non-exempt reporting company and will need to file.
FinCEN is Expecting Associations to File Under the CTA
If you weren’t already convinced, FinCEN’s April 18 FAQs make it very clear that FinCEN is expecting Associations to file under the CTA.
New FAQ D.13 answers the question, “Who is the beneficial owner of a homeowners association?”. FinCEN is expecting Associations to file and wants to make it clear for them how to apply FinCEN’s BOI regulations.
As expected, FAQ D.13. follows the same analysis applicable to other reporting companies, looking at beneficial ownership both through the lens of the 25% ownership rule and the substantial control rule.
FinCEN wrote in FAQ D.13. that an Association’s senior officers, those with a power of appointment, important decision-makers and those with substantial control should be included as beneficial owners.
If FinCEN was planning to provide a broad exemption for homeowner associations and community associations in 2024 it would not have amended its FAQs to state so clearly precisely how Associations must file.
What Should Associations and Association Management Companies Do Now?
Associations and Association Management Companies should begin preparing to file before the end of the year.
Associations formed during 2024 will need to file their initial BOI reports within 90 days from the date of formation.
Associations formed before 2024 will need to file no later than January 1, 2025. Because of the expected volume at the end of the year, it would be prudent for most Associations to start their planning now, with a goal of filing an initial BOI report in the third quarter or early fourth quarter of 2024.
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