Is your association complying with The Corporate Transparency Act (CTA)

The Impact of Reserve Studies in Light of the Corporate Transparency Act

The Corporate Transparency Act (CTA), a federal law, has introduced new reporting obligations for incorporated community associations, impacting how these associations, and their boards, operate. While the CTA’s implementation and enforcement are subject to change due to ongoing legal challenges, understanding its implications, especially in conjunction with financial planning tools like reserve studies, is crucial.

The CTA mandates that incorporated community associations file a Beneficial Owner Information (BOI) report with the U.S. Treasury’s Financial Crimes Enforcement Network (FinCEN). This report requires disclosing identifying information about the association’s beneficial owners, which includes individuals who exercise substantial control, such as current board members. Each director must obtain a FinCEN identifier (FinCEN ID) before the BOI report is filed. The report itself must include the association’s legal name, Employer Identification Number (EIN), and the FinCEN IDs of its current directors. Critically, associations must update their BOI report within 30 days of any change in directors.

How the CTA Interacts with Reserve Studies:

Reserve studies are long-term financial planning tools that help community associations anticipate and prepare for major repair and replacement expenses. They provide a roadmap for funding these projects, often over a 30-year period. The CTA’s reporting requirements, particularly the need to update the BOI report with any director changes, have several implications for associations utilizing reserve studies:

Board Turnover: Reserve studies often involve multi-year planning horizons. Given the CTA’s 30-day update requirement for director changes, associations must be diligent in tracking and reporting these changes to FinCEN. Frequent board turnover, which can be common in some associations, increases the administrative burden associated with CTA compliance.
Financial Transparency: Both reserve studies and the CTA aim to increase transparency. Reserve studies provide transparency to homeowners regarding the association’s financial health and long-term planning. The CTA adds another layer of transparency by disclosing information about the individuals who control the association’s finances. This combined emphasis on transparency reinforces the importance of accurate and up-to-date financial records.
Long-Term Planning and Budgeting: Reserve studies inform budget planning by identifying future capital expenditures. The CTA’s reporting requirements add a new administrative cost to the association’s budget, which should be considered when developing long-term financial plans. While likely a minor cost, it is an additional factor to incorporate into the overall financial picture.
Potential for Increased Scrutiny: The CTA’s focus on beneficial ownership may lead to increased scrutiny of community association finances, including reserve funds. Associations should ensure their reserve studies are comprehensive, up-to-date, and readily available for review. This proactive approach can demonstrate financial responsibility and transparency.

Important Considerations for Washington State Community Associations:

Consult Legal Counsel: Given the evolving nature of the CTA and its interpretation, consulting with legal counsel specializing in community association law is strongly recommended. This is particularly important to understand the specific implications of the CTA for your association and to ensure compliance with both federal and any potentially related state requirements.
FinCEN Guidelines: Associations should familiarize themselves with the most current FinCEN guidelines and any updates issued by the Treasury Department. The FinCEN website is the official source for this information.
Accountant Consultation: Consulting with your association’s accountant is also advisable, especially concerning any tax-related implications of the CTA.
Stay Informed: Keep abreast of any changes or updates to the CTA and its implementation. Reputable sources like CAI and legal professionals can provide updates.
Washington State Law: While the CTA is a federal law, it’s important to be aware of any related or potentially conflicting requirements under Washington state law. Legal counsel can help navigate this.

By understanding the interplay between the CTA and reserve studies, community associations can ensure they are meeting their legal obligations while also effectively planning for their long-term financial health.