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.

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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.

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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: __________________

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The Basics of the Tax Consequences of a Business Asset Sale

The sale of a business by a seller to a purchaser generally can take two forms: A sale of the business’s assets or a sale of equity interests in the business. As a general rule, the seller will favor a sale of equity and the purchaser will favor an asset sale. This is because with an equity sale, the seller will have capital gain whereas with an asset sale, the seller generally has some ordinary income. An asset purchase is more appealing to the purchaser because the tax basis of the assets will be equal to their purchase price and can be depreciated on that basis. The sale of a business via an asset sale is treated as if each of the assets of the business were sold separately for purposes of determining gain or loss.

All assets sold in an asset sale must be classified as capital assets, depreciable property used in the business, real property used in the business, or property held for sale to customers, such as inventory or stock in trade. The gain or loss on each asset is figured separately. The sale of capital assets results in capital gain or loss whereas the sale of real property or depreciable property used in the business and held longer than one year results in gain or loss under IRC § 1231. The sale of inventory results in ordinary income or loss to the seller.

In general, both the purchaser and seller of a business must use the “residual method” to allocate the consideration to each business asset transferred. The purchaser’s consideration is the cost of the assets acquired. The seller’s consideration is the amount realized (money plus the fair market value of property received) from the sale of assets. The residual method determines gain or loss from the transfer of each asset and how much of the consideration is for goodwill and certain other intangible property. It also determines the purchaser’s basis in the business assets.

The residual method requires the consideration to be reduced first by the cash and general deposit accounts (including checking and savings accounts but excluding certificates of deposits) and allocated among the various business assets in the following order:

Class I: Cash, demand deposits, and similar cash items.
Class II: Readily marketable stock and securities and certificates of deposit.
Class III: All other tangible and intangible assets not in any other class.
Class IV: IRC § 197 intangibles other than goodwill and going concern value.
Class V: Goodwill and going concern value.

In this way, gain and/or loss is allocated among all the assets of the business.

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Probate Assets vs. Non-Probate Assets

Some people are under the mistaken impression that having a will means that the probate process will be avoided upon death. Having a will allows you to appoint who will handle your affairs and who will inherit assets, and it can provide for various methods to lower costs to the estate (such as waiving the bond required of a personal representative). However, a will does not avoid the probate process; it simply gives directions to the probate court, and it must be probated in order to be effective.

If an asset is held in joint tenancy and a joint tenant survives, that asset will be a non-probate asset and pass outside of the probate process. Life insurance, annuities, IRAs, pension plans, or accounts with a P.O.D. (payable on death) or T.O.D. (transfer on death) designation will avoid probate using beneficiary designations, if the beneficiary survives. Any property held in trust, such as a living trust, will be non-probate property. Nearly all other assets cannot be transferred upon death without passing through the probate process.

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Personal Residence LLC and Trust Tax Considerations

Some asset protection attorneys recommend placing personal residences into entities, while others prefer trusts. While both have their pros and cons, no decision should be made without ensuring that the federal tax benefits of owning a personal residence are maintained.

The Internal Revenue Code provides a significant tax advantage to taxpayers who own a personal residence. First is the interest deduction of as much as $1 million of acquisition indebtedness and up to $100,000 of home equity indebtedness on a qualified personal residence. Taxpayers who do not hold legal title to a residence but who can establish they are the equitable owners of the property are entitled to deduct mortgage interest paid by them with respect to the property. Transferring a personal residence into an asset protected entity should not affect this deduction as long as the taxpayer remains the equitable owner of the property.

Second, and more important, IRC § 121 provides for an exclusion from taxable income of $250,000 ($500,000 for married couples) worth of gain on the sale of a personal residence. This exclusion may be claimed every two years as long as the taxpayers owned and used the property as their principal residence for two out of the previous five years prior to the sale.

Treas. Reg. § 1.121-1(c)(3)(i) provides that if a taxpayer owns his or her residence in a trust, as long as the taxpayer is treated as the owner of the trust, he or she is treated as owning the residence for purposes of satisfying the two-year ownership requirement. Treas. Reg. § 1.121-1(c)(3)(ii) provides that if an individual taxpayer owns his or her residence in an entity, as long as the entity has the taxpayer as its sole owner and is disregarded for federal tax purposes, he or she is treated as owning the residence for purposes of satisfying the two-year requirement.

One other possibility exists in community property states where a married couple owns the limited liability company 50-50, as the entity can elect to be taxed as a disregarded entity under Rev. Proc. 2002-69. The couple will be able to own their residence in the LLC and satisfy the two-year requirement.

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