2023 Marcum Year-End Tax Guide

19

THE MARCUM YEAR-END TAX GUIDE 2023

domestic reporting company – a corporation, limited liability company, limited partnership, or similar entity created by the filing of a document with any state, territory, or Indian tribe; or (b) a foreign reporting company – a non-US entity that registers to do business with a US state, territory or Indian tribe. • For reporting companies formed before January 1, 2024, the first beneficial ownership reporting form is due January 1, 2025. • The first beneficial ownership reporting form is due ninety days after formation for reporting companies formed between January 1, 2024, and December 31, 2024. The time for reporting this category of company was thirty days. FinCEN provided an extension of the deadline to 90 days. • For reporting companies formed on January 1, 2025, and later, the first beneficial ownership reporting form is due thirty days after formation. After the initial report, there is no required annual or quarterly filing. However, if there is any change to the reported information, an amendment must be filed within 30 days after such beneficial ownership change. There are 23 listed exemptions for the CTA reporting requirements, which include: i) large operating companies (i.e., which have more than 20 full-time US employees;

reported more than $5 million of US sourced income for the prior year; and have an operating physical presence in the US; ii) non-profit entities and political organizations; iii) certain public companies, insurance companies, banks, registered investment companies, and certain entities already under oversight. Unfortunately, small businesses will be primarily subject to these rules. This may place an additional administrative burden on these companies, which they may not be currently prepared to track. FinCEN has issued a guide, which includes checklists, to determine the applicability of the filing requirement and who is considered a beneficial owner. A beneficial owner is an individual who directly or indirectly owns or controls at least 25% of the ownership interests or exercises substantial control over the entity. Information must also be reported for up to two Company Applicants for a reporting company formed on or after January 1. 2024. This is a person who directly files the documents creating the entity or is primarily responsible for controlling such filing. A substantial amount of information must be provided for each beneficial owner and company applicant, including i) the individual’s full legal name, ii) date of birth, iii) current residential address, or Business address if a company applicant is in the business of forming entities; iv) an identifying

number; and v) an image of the individual (e.g., passport photo, US driver’s license, US identification card, or, if there is no US issued document, a foreign passport) HOBBY LOSS RULES Several developments occurred this year involving activities entered into without a profit motive, commonly referred to as the “hobby loss” rules. Deductions are limited to the income generated for these activities, and a loss cannot be created. In audit situations where the IRS attempts to apply this limitation, it is essential to demonstrate a reasonable expectation of profit, including asset appreciation. The cases and administrative guidance point out the importance of handling the operations in a business-like manner to maximize the position that one is engaged in a for-profit activity. In Woodries v. Commissioner, the Tax Court determined joint return filers to be engaged in a for-profit activity. The court noted that they carried on the activity in a professional manner; one spouse had decades of ranching experience, and the taxpayers had a reasonable expectation that the ranch would increase in value. The taxpayer did not fare as well in Avery v. Commissioner. In that case, an attorney’s “business” expenses, which exceeded $300,000, were not treated to be in connection with an activity entered into for profit. The races were held in states distant from the attorney’s practice.

marcumllp.com