An EIN (Employer Identification Number) is like a Social Security Number for your business. You now need one to open a bank account.

But there are many business owners who don’t have an EIN number. This could be from the advice of their CPA. Or maybe, somehow, they never bothered to get one. But with the passage of the Corporate Transparency Act (CTA), every business entity is now required to have an EIN.

Under the CTA, companies are required to submit a Taxpayer Identification Number (or TIN) to FinCEN. This TIN can be an Employer Identification Number (EIN), a DUNS Number, or a Legal Entity Identifier (LEI). In most cases, you will use your EIN.

This may come as a shock to many business owners. Many of them don’t have an EIN, and never thought they needed one. Many get by without ever obtaining an EIN. Unfortunately, this is no longer the case.

And what happens if these business owners don’t get an EIN number, and then fail to file their CTA? They could face very steep penalties. These include up to $10,000 in fines, or even spending 2 years in jail.

For business owners, the answer is very clear: Get an EIN number, or face the consequences.

Luckily, Corporate Direct is here to help you navigate the CTA. We will perform your CTA filings, and can also obtain an EIN number for you. It’s now just one of those things: It isn’t hard, but it’s necessary.

Dave was a young man from Washington. He had lived in Seattle his whole life, and never had any plans of leaving. In fact, Dave had just purchased a $1 million home 20 minutes from downtown Seattle.

Dave had cousins in California who were avid real estate investors. They would regularly form LPs (Limited Partnerships) to syndicate deals. They would then use these LPs to buy commercial properties. To finance the purchase, they would raise money from investors and give them an equity stake in the syndicate LP.

After seeing his cousins’ success, Dave asked his cousins if he could invest with them. They agreed, and allowed Dave to invest $100,000 in their next deal. Dave then set up a Wyoming LLC to invest the $100,000 into the syndicate LP, which owned a new $100 million shopping center in Southern California.

The first year was very successful. The center was fully occupied and had lots of foot traffic. The monthly checks investors received from the syndicate LP were much higher than expected.

Dave was happy that he invested in the deal. That was until he received a letter from the California Franchise Tax Board (FTB) demanding that he pay the $800 franchise tax for his passive Wyoming LLC.

How could this be? The syndicate LP paid its $800 fee to California. His Wyoming LLC was just a passive investor in the syndicate LP. Plus, Dave had never lived in California, and he didn’t even directly own any property there! Despite all this, Dave still needed to cough up the $800 for his Wyoming LLC.

This is all thanks to California’s Revenue & Tax Code Section 23101(b)(3). Under this section, any LLC (or other entity) is doing business in California if the value of its real and tangible personal property in California meets the lesser of two requirements.

The first is that the property exceeds $67,000 (which is yearly adjusted for inflation). The second is that the property exceeds 25% of the taxpayer’s total real property and tangible personal property. If a passive Wyoming LLC meets either requirement, it must pay the annual $800 franchise tax since, under California’s definition, it is doing business there.

Under the second requirement, Dave could argue that because he owned a $1 million home in Washington, and only invested $100,000 in California, that well over 25% of his total real property was located outside of the Golden State.

However, this doesn’t matter to the FTB. And this is because he still meets the first requirement, as his interest in the syndication is worth $100,000, catching his Wyoming LLC (which was passive and had no management authority) into the tax. Dave still had to pay that darn $800 franchise tax for “doing business” in California.

If you don’t live in California, but decide to invest there, you need to know about this franchise tax. If you don’t, you could end up like Dave, wondering why he should invest in California in the future.

Every American needs to file a federal tax return with the federal government. And if you live in California, you are required to fill out Form 540 for your individual state income taxes.

This makes sense. If you’re a resident of California, you’ll file a tax return and pay income taxes to the state.

But here’s what many people don’t know: even some California nonresidents need to file a return there. If you earned any income in California but live outside of it, you are required to file Form 540 NR with the California Franchise Tax Board.

This form allows the state to see the income from all of the nonresident’s sources. From here, the state then parses out the California tax on a ratio.

For any nonresident who wants to invest in California, this serves as a warning. If you live out of the Golden State but own property there, California would still like to see where every penny of your income came from. Perhaps this is another reason why people are hesitant to invest there.

Given the restrictions on the ownership of S-Corporation stock, it may be difficult for grantors to store such stock into a trust. However, upon proper election, the IRS regulations allow for two types of trusts to remedy this issue.

Qualified Subchapter S Trust (§ 1361(d))

The first such trust is the Qualified Subchapter S Trust (QSST). A QSST is a trust that requires only one beneficiary who must be a United States resident. The beneficiary is required to make the QSST election within 2.5 months of the trust receiving stock. A Sample QSST election form is included below.

Electing Small Business Trust (§ 1361(e))

The second type of trust is the Electing Small Business Trust (ESBT). An ESBT is a trust that allows for multiple beneficiaries, and the beneficiary can be an individual, estate or a charitable organization. The trustee is required to make the ESBT election within 2.5 months of the trust receiving stock.

Why the ESBT is better than the QSST

ESBTs are preferred over QSSTs for the simple reason that ESBTs are the more flexible option. QSSTs can only have one beneficiary that must be an individual. In addition, the children of the QSSTs beneficiary are barred from becoming beneficiaries. On the other hand, an ESBTs can have multiple beneficiaries including individuals, estates, and charitable organizations, and children of ESBT beneficiaries can become beneficiaries in the future.

It is worth noting that one must be careful when making such an election. Failure to make these elections in a timely manner may result in the corporation losing its Subchapter S status, which could impose the double tax under Subchapter C. Angering other shareholders this way is not a position that you want to be in.

California residents beware! If you own an interest in an out of state LLC and sell it, you will have to pay even more in taxes.

The California Office of Tax Appeals (OTA) recently held such in Matter of Buehler, OTA Case No. 21067960, 2-23-OTA-215P (pending precedential) (issued Feb. 28, 2023).

In Buehler, Mr. Buehler, a California resident, owned an interest in a Massachusetts LLC. He was also one of the LLC’s three managers. The LLC provided portfolio management services and had an office in Massachusetts.

Buehler then sold his interest in the LLC, and paid taxes in Massachusetts. But because Buehler was a California resident, the Golden State wanted their share too.

The OTA found that Buehler’s interest in the LLC constituted intangible property. Because it was intangible property, Buehler’s interest was subject to California income tax. In order to avoid this tax, the LLC interest would have to acquire a “business situs” in Massachusetts.

The OTA defined having a “business situs” as “being localized in connection with a business, trade, or profession in the state so that its substantial use and value attach to and become an asset of the business, trade or profession in the state.” If a person has a business situs in that state, they can avoid being subject to California income tax.

Despite the fact that Buehler was a managing partner of the LLC, and the LLC owned property in Massachusetts, Buehler still did not acquire a “business situs” in Massachusetts.

The OTA held that because Buehler’s LLC interest did not acquire a “business situs” in Massachusetts, the sale of the interest is subject to California income tax.

This has far-reaching consequences for California residents. If you sell your out-of-state LLC interests, you will face double taxation. This is true, no matter how active or passive that interest may be.

By: Ted Sutton, Esq.

There are some promoters out there who claim that they have a trust strategy whereby the trust avoids paying income taxes. But recent IRS rulings have started to crack down on this practice.

The most recent ruling came from Chief Counsel Memorandum (CCM) 2023-0006. The IRS made this ruling because some promoters claimed that if the trustee allocates trust income to the trust corpus, and the trustee doesn’t make distributions to the beneficiaries, then the trust income won’t be taxable.

However, this section misrepresents the tax law. Section 643 defines Distributable Net Income (DNI), which is the part of income that’s taxable to the beneficiaries. The promoters argue that because no distributions were made to the beneficiaries, that income held in the trust would not be taxable.

Even so, Section 641 says otherwise. This section of the tax code defines taxable income for estates or any kind of property held in trust. Under this section, if the trustee allocates trust income to the trust corpus, then the trust income is taxable.

Be very wary of promoters who suggest that they can set up trusts to help you avoid paying taxes. We here at Corporate Direct will help you be on the lookout for them.