Welcome to CPA at Law, helping individuals and small businesses plan for the future and keep what they have.

This is the personal blog of Sterling Olander, a Certified Public Accountant and Utah-licensed attorney. For over seven years, I have assisted clients with estate planning and administration, tax mitigation, tax controversies, small business planning, asset protection, and nonprofit law.

I write about any legal, tax, or technological information that I find interesting or useful in serving my clients. All ideas expressed herein are my own and don't constitute legal or tax advice.

Fixing Problems with Online IRS EIN Applications

Having obtained hundreds of Employer Identification Numbers for clients over the past few years, I have learned a number of remedies for rejected online EIN applications submitted on the IRS's website. Consider the following potential causes:

Every EIN application requires a responsible party name and matching tax ID number. Often, this will be an individual and their social security number, but sometimes the responsible party is another business with another EIN number. The IRS will not process online EIN applications if the responsible party is an entity with an EIN previously obtained through the internet. In other words, unless the responsible party is an individual with a social security number or an entity with an EIN that was not obtained through the internet, the online EIN application will always return an error.

If the first two numbers of the entity's EIN Number begin with 20, 26, 27, 45, 46, or 47, that EIN number was obtained through the online EIN application. Accordingly, that entity can never be a responsible party for another online EIN application; you will have to apply over the phone or list another responsible party on the online application, such as the individual who owns the entity. If the responsible party's EIN begins with 30, 32, 35, 36, 37, 38, 61, 80, 90, or 91, that EIN number was not obtained through the online EIN application, and that entity should be able to be a responsible party on another online EIN application.

The IRS will only issue an EIN to one responsible party per day. This limitation applies to all requests for EINs, whether through the online EIN application or by phone, fax, or mail. If an EIN has been issued to any entity by any application method on a particular day, the responsible party on that EIN application must wait until the next day before being the responsible party on another EIN application.

A rejected EIN application indicating Reference Number 101 has a name conflict. The IRS requires a unique entity name before it will issue an EIN, similar to how the secretary of state requires a unique entity name within that state before Articles or Certificates of Formation may be successfully filed. However, because the IRS is a federal agency issuing EINs for entities in all 50 states, it potentially checks for duplicate entity names across multiple states. There are numerous references to a state on the online EIN application, such as the physical location state, mailing address state, and the state where the Articles are or will be filed.

If all of these state references are the same, the IRS will only check for previously-issued EINs with that entity name in that one state. If multiple states are reported, for example, if the Articles were filed in a different state than the business's physical address, the IRS will check both states for name availability before issuing an EIN, even though filing the Articles only requires a unique entity name in the one state where the Articles are being filed. Applying for an EIN over the phone may be required in these name conflict situations; often, the IRS agent will ask to see a copy of the Articles before issuing an EIN.

Reference Numbers 109 and 110 indicate technical problems and an EIN may still be obtainable using the exact same information that resulted in the error. The error might result from too many people trying to obtain an EIN at the same time. Try again later, or try closing and reopening the browser, using a different browser, using a different computer, clearing cookies, restarting the computer, or adjusting your security settings. Or, feel free to contact me; I would be happy to try and help.

Section 179 Deductions for Non-Corporate Lessors

For asset protection purposes, business capital assets should normally be owned by a separate entity, as opposed to the business operating entity, and then leased back to the operating entity. A non-corporate leasing entity can still qualify for the favorable tax treatment of newly-purchased business assets under IRC § 179, which allows businesses to expense certain depreciable assets instead of depreciating them over a longer period of time. However, two additional requirements must be followed.

First, the term of the lease (including options to renew) must be less than 50 percent of the class life of the property. Second, for the 12 month period after the property is transferred to the lessee, the lessor's deductions attributable to the property (not including rents and reimbursed amounts) must exceed 15 percent of the rental income paid by the lessee.

In Ross P. Thomann v. Commissioner (TC Memo 2010-241), as discussed by Paul Bonner in the July 2011 Journal of Accountancy, the IRS disallowed a section 179 deduction for farm equipment primarily due to the lack of a written lease that clearly identified the property leased and the lease term. The taxpayer also presented no documentation of class life or a comparison of lease income with the lessor's deductions.

In order to avoid denial of the 179 deduction like the taxpayer in Thomann, documentation is the key. The lease agreement should clearly document each property being leased as well as the asset class life of each property so as to ensure that the term of the lease, taking into account options to renew, is less than half of the class life. Furthermore, the rent attributable to each property being leased should be documented, as well as the expenses, to ensure and demonstrate that deductions exceeding 15 percent of the rent income are taken by the lessor in the first 12 months. The lease agreement may need to specify that the lessor is responsible for expenses under the lease, and the lessor may need to frontload scheduled maintenance, insurance, etc. to ensure the 15 percent requirement is met.

By undertaking these steps, both asset protection and significant tax benefits can be realized.

Sample Form for S-Election Revocation

While entities taxed as S-Corps are the default recommendation of most business and tax planners, there are a number of benefits derived from being taxed as a C-Corp that should be carefully considered. C-Corps can deduct expenses that other tax entities cannot, such as 100% of the health insurance paid for employees, including shareholders in the corporation, as well as the costs of any medical reimbursement plan. While C-Corps do leave its shareholders open to the notorious double tax, this may not be a problem if profits are low.

If after careful consideration with your CPA, you decide that you would like to revoke the S-Corp status of your closely-held business, the following is a form letter that can be used:


_______________ ____, 20____
Department of the Treasury
Internal Revenue Service
_______________, ____ __________

Re: Revocation of S Corporation Election of _______________, Inc., Taxpayer Identification Number: ____-______________

To Whom It May Concern:

Notice is hereby given, pursuant to Section 1362(a) of the Internal Revenue Code, that _______________, Inc., a corporation incorporated in the State of _______________, with address of _______________, _______________, ____ __________, revokes its S corporation election filed with you on IRS Form 2553 dated _______________ ____, 20____.

The number of shares of the corporation’s stock (including non-voting stock) issued and outstanding at the time of this revocation is __________. The first taxable year for which this revocation is intended to be effective is the corporation’s taxable year beginning _______________ ____, 20____. Required shareholder consents to this revocation of election are attached.

Sincerely,


______________________
President of _______________, Inc.


Shareholders' Consent to Voluntary Revocation of
Election of S Corporation Status

The undersigned, being shareholder(s) of _______________, Inc., a corporation incorporated in the State of _______________, hereby consent to the revocation of its election under Section 1362(a) of the Internal Revenue Code to which this consent is attached. The address of the corporation is _______________, _______________, ____ __________. The corporation’s Taxpayer Identification Number is ____-______________. Each of the undersigned shareholders taxable year ends on December 31.

The undersigned shareholders’ name, address, taxpayer identification number, number of shares owned, and date acquired are as follows:

Shareholder Name:                Address:                         TIN:                      No. of Shares:   Date Acquired:

______________________ ____________________ ______________ ____________ __________________

______________________ ____________________ ______________ ____________ __________________

______________________ ____________________ ______________ ____________ __________________

______________________ ____________________ ______________ ____________ __________________

Signed: ____________________ Title: ____________________ Date: __________________

Signed: ____________________ Title: ____________________ Date: __________________

Signed: ____________________ Title: ____________________ Date: __________________

Signed: ____________________ Title: ____________________ Date: __________________