December 2023 

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 Date: 121423 ... New Tax Law May Spell Serious Challenges for Condos/HOAs. ..... FinCEN Requiring New Beneficial Ownership Reporting Rule Effective January 1, 2024.  

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The Corporate Transparency Act is likely going to catch many condo and HOA boards off guard. That's according to Elizabeth White, counsel at the law firm of Sands Anderson PC in Williamsburg, Va., where she leads the firm's national community association industry team.
White and her colleague, Danielle Wang, of counsel at the firm, are sounding an alarm to the community association world about new reporting requirements under law as part of the Anti-Money Laundering Act of 2020. Essentially, the government wants financial information to combat money laundering, terrorist funding, and other financial crimes. But White and Wang say the new requirements may have a chilling effect on the willingness of members to run for election.
"This legislation passed with bipartisan support, and the intentions are good," says Wang. "But this hasn't gotten a lot of attention in the community association industry. We're doing our best to spread awareness with our clients and management company partners and to raise the alarm and national awareness."
 

Here's what you need to know on this topic, which is surely to evolve as community association lawyers like White and Wang learn more. FinCEN Wants Financial Details.
 

"The CTA is intended to enhance beneficial ownership transparency for reporting companies," explains White. "The law requires reporting companies to submit beneficial ownership information to the U.S. Department of the Treasury's Financial Crimes Enforcement Network, or FinCEN.
"In other words, the federal government wants a better idea of who owns or controls companies so it can better monitor corruption and financial crimes," she adds. "Unfortunately, the law is so broadly written that it captures incorporated community associations in its broad net, and very few will qualify for an exemption. "The exemptions for HOAs are mainly limited to companies with more than 20 full-time employees and those that are tax-exempt for IRS income tax purposes under Section 501(c)(3)," says White. "Most associations aren't." Wang says she and other lawyers at her firm knew the CTA was coming late last year, which was when the first set of regulations were finalized. "It was hazy about how they might have applied to community associations," she explains. "We didn't have the tax piece weighed in. "There's an exemption if you're a certain type of tax-exempt entity," says Wang. "Understanding that took bringing in our tax teams to clarify how our clients would fit into the tax scheme. The answer is that a lot of our community association clients aren't going to be exempt." Why Associations Must Report Its board members' control over associations - which are most often corporations - that will trigger the requirement to comply with the CTA. 

"There are two types of beneficial owners," says Wang. "The first type is those who exercise substantial control over the company or own or control at least 25 percent of the ownership. It's difficult to find individual members who own 25 percent of a community association, especially in Virginia. So, it'll be the board's control over the corporation that triggers the requirements. "It could be officers or other individuals as well," she notes. "And that's where it gets muddy as well when it comes to exactly who is going to be needing to report. At a minimum, it'll be the board, but that's just the minimum. 

"If there's an owner who owns 25 percent or more of a community, that may also qualify for reporting," says Wang. "Let's say Joanne Millionaire owns 25 percent of the condos. She may also need to file with FinCEN, in addition to the association meeting its duty to report.
"The reporting company under the CTA has the duty to report," she notes. "What's not clear in an HOA or condo is how that's going to be coordinated. Should there be an individual assigned to collect this information for the report?" Talk to Your Lawyer Soon. Wang's advice to boards is to set up a consultation with your community association lawyer right away. "It takes a while for community associations to act," she explains. "If you need to amend your bylaws or declaration or any other governing documents in response to these new requirements, you need to start thinking about that now.

"The first report will need to be filed by the end of 2024," she notes. "It could be that everyone on the board is very happy to provide this information now. But what about the next set of board members after your election in 2023? Without having policies in place or the documents amended properly, it could be a problem getting the reporting information to FinCEN."

And what if your lawyer suggests you amend your documents to avoid these reporting requirements? That could take time. But it's also a bit of a longshot, says White. "When it comes to amending to become a nonprofit, you could look into that as an association, and you'll definitely need to go to an attorney who has some competency in this tax field," explains White. "There's a specific tax exemption for the CTA, which is being a 501(c)(3). But associations must be very specific in their corporate structure and operations to qualify.

"A lot of communities being created these days may not qualify," she adds. "You really need to get into the nitty gritty of the association's governing documents in connection with your tax activities to see if you can in fact meet the requirements. And if you apply and are denied 501(c)(3) status, you have to begin reporting under the CTA. "Also, if you have to change your governing documents so you fit into the glass slipper, owners would have to consent to those changes," notes White. "I've been doing this for 37 years, and many of my clients ask about nonprofit status. But not a single one has ever pursued it. "Once they find out the limitations, I like to say there are strings for that," she explains. "Most say they don't want those strings. And there's a high likelihood they won't qualify anyway." As Wang noted, start investigating your specific situation now because noncompliance could be expensive. "The penalties for noncompliance are fines of $500 a day up to $10,000," she states. "For willful failure to comply - essentially saying, 'We refuse' - it could be up to two years of jail time."
One more note. White and Wang say this is yet another liability added to associations that may push owners into deciding board service is too much of a burden. They're working with one of the country's largest management companies, and its leaders are concerned over the CTA for that very reason. They're already having a hard time finding people willing to serve at their associations nationwide. They say this probably won't help.

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ADDITIONAL INFORMATION ON THIS NEW LAW ....

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• FinCEN Requiring New Beneficial Ownership Reporting Rule Effective January 1, 2024

• Corporate Transparency Act Poses Challenges for Homeowner Associations: Most HOAs Will Need to File in the Coming Year.

• HOAs Inadvertently Caught in Federal Crossfire: Ten Things You Need to Know About Community Associations and the Corporate Transparency Act. 

• The Financial Crimes Enforcement Network (FinCEN) issued a final rule that sets forth beneficial ownership information reporting requirements as mandated by the Corporate Transparency Act. The rule becomes effective January 1, 2024.

• Small Entity Compliance Guide.

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Sara E. Barry CAM

Licensed Insurance Producer

UNLV Certified Paralegal & Legal Secretary

Held Highest National CAM Designation (1993-2018)

Community Association Solutions 

Henderson, NV 89053

702-249-0944

seblv@hoasupport.info

www.HOASupport.com

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Date: 120723 ... Two Important Classes in January                                                                                      

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Two classes will be held in January that I am hosting on Zoom and I have attached the notices.  These are really good for new Reserve Specialist’s to take to get their license and renew their license vs. just any law class, etc.  Please let me know if you have anyone who wants to take these classes and I will put them down and send the link before the classes.    

Link to 01/18/24 class ... Budgets and Reserves in the CIC.

Link to 01/30/24 class ... NAC 116, NAC 116A NRS 116 & NRS 116A (NRS 116B & NAC 116B)  

Sara E. Barry CAM

Licensed Insurance Producer

UNLV Certified Paralegal & Legal Secretary

Held Highest National CAM Designation (1993-2018)

Community Association Solutions 

Henderson, NV 89053

702-249-0944

seblv@hoasupport.info

www.HOASupport.com