The U.S. government this week appealed a federal judge’s injunction against the Corporate Transparency Act (CTA), a law designed to increase transparency in corporate ownership. While the law aims to combat financial crimes such as money laundering, critics argue it imposes excessive burdens on small businesses, a claim supported by Treasury’s own estimates.
At the heart of the ongoing legal battle, Texas Top Cop Shop, Inc., et al. v. Garland, et al., lies the question of whether the federal government has overstepped its constitutional bounds.
For small businesses, the CTA introduces significant administrative burdens. The Treasury’s Financial Crimes Enforcement Network (FinCEN) estimates that compliance will cost small businesses $126.3 million in the first year alone and $35 million annually thereafter.
In total, FinCEN projects that the reporting requirements would cost small businesses $22.7 billion in the first year and $5.6 billion in subsequent years. For mom-and-pop operations with limited resources, these requirements may be particularly onerous, raising concerns about how such costs might stifle growth and innovation.
One of the central issues in the legal dispute is whether the CTA infringes upon state sovereignty. U.S. District Judge Amos Mazzant of the Eastern District of Texas ruled that the law constitutes "unprecedented" federal overreach into areas traditionally regulated by the states, such as the formation and governance of corporations.
According to congressional estimates, more than two million corporations and limited liability companies are formed under state laws each year. This highlights the tension between federal regulations and state prerogatives in governing corporate entities.
If the U.S. Court of Appeals for the Fifth Circuit upholds the government's appeal, opponents—including the National Federation of Independent Business (NFIB), SL Law, and the Center for Individual Rights—may take the case to the Supreme Court.
The potential Supreme Court review invokes parallels to National Federation of Independent Business v. Sebelius (2012), which addressed the limits of federal authority under the Commerce Clause. In that case, the Court upheld the Affordable Care Act's individual mandate but underscored significant constraints on federal power. This precedent suggests that the CTA’s opponents might find grounds for challenging the law on similar constitutional principles.
On the other hand, the majority of justices supplanted both states’ rights and interstate commerce laws when it ruled last year that pork products sold in California must come from sows with at least 24 square feet of living space, or an area slightly smaller than a full-size mattress. This means even pork that comes from farms in places like Oklahoma would have to meet California’s requirements.
Accountants, CPAs, and financial professionals should stay informed about developments in the CTA case. Your clients may rely on you for guidance on how to navigate compliance if the reporting requirements are reinstated. Currently, businesses are not required to file Beneficial Ownership Information (BOI) reports due to the federal judge’s injunction halting the law’s implementation.
However, the AICPA has released a statement encouraging practitioners to urge their clients to prepare the documentation necessary to file a BOI report. Many practitioners we have spoken to are planning to advise clients to file a BOI report with FinCen regardless of the injunction. At the time of publication, the FinCen website was still accepting filings.
For a detailed explanation of the original beneficial ownership information (BOI) reporting requirements under the CTA and practical strategies for compliance, refer to Navigating BOI Reporting: A Guide for Accountants on The Woodard Report. This resource offers actionable advice to support small business clients facing these challenges.
The legal and financial implications of the Corporate Transparency Act are immense for small businesses. As the case unfolds, accounting professionals have a critical role to play in helping their clients adapt to potential compliance demands while safeguarding their interests. By staying informed and proactive, you can ensure your clients are well-prepared, no matter the outcome.