TAX IDENTIFICATION NUMBERS
Ethan R. Okura
Back in June, I wrote an article on how Obamacare affects the income taxes that trusts pay. It’s a very complicated subject (taxes always seem to be, don’t they?) and my quick summary of how it works may have left you with more questions about how trusts are taxed than you had before you read the article. Today I’m going to explain how Tax Identification Numbers work, both for Trusts and for other business entities.
Generally, your personal Tax Identification Number (TIN) is the same as your Social Security Number (SSN). That’s the number you use to file your personal income taxes every year. Individuals who work or invest in the US, and/or are required to report or file taxes in the US, but who are not eligible to receive a Social Security Number, need to apply for an Individual Taxpayer Identification Number (ITIN).
Another type of Tax Identification Number, intended exclusively for businesses, is an Employer Identification Number (EIN). All Corporations and Partnerships are required to have an EIN. When you own a business as a Sole Proprietor, you may elect to use your Social Security Number to report all the income and expenses of your business on Schedule C of your personal Income tax Return, but if you have any employees, you must obtain an EIN. Some Sole Proprietors choose to use an EIN instead of their SSN—even if they don’t have employees—to help reduce the possibility of identity theft or because their bank requires an EIN in order to open a business checking account.
An LLC is a very flexible type of business entity. The owner(s) of an LLC can file IRS Form 8832 to elect to have the LLC treated as a C-Corporation or an S-Corporation for tax purposes, in which case it would need an EIN. If no such election is made, an LLC with a single owner is disregarded for Income tax purposes, and the owner reports the income and expenses of the LLC on his own tax return the same way a Sole Proprietor would, so no EIN is needed. When an LLC has two or more owners and no Form 8832 election is made, then it’s treated as a partnership for Income tax purposes and the LLC must obtain an EIN.
Well, what about Trusts? In general, an Irrevocable Trust (one that cannot be amended or cancelled) requires the Trustee to obtain a separate Tax Identification Number (in the form of an EIN). However, if it qualifies as a “Grantor Trust”, then the Trustee may use the Grantor’s Social Security Number instead of obtaining an EIN. The Grantor, sometimes called the Settlor or Trustor, is the creator of the trust who put assets into it. The Internal Revenue Code §§671-679 define when a trust is to be treated as a “Grantor Trust” for income tax purposes, and it all depends on the terms of the trust. All Revocable Trusts are Grantor Trusts. Some Irrevocable Trusts can also be Grantor Trusts. If it is a Grantor Trust, you may use the Grantor’s SSN or you may choose to use an EIN for the Trust’s tax reporting requirements.
It gets a little more complicated when you have multiple Grantors for one trust, but Treasury Regulation §1.671-4 clarifies: When you have a husband and wife who are both Grantors of a Grantor Trust (revocable or irrevocable), they may pick either the husband’s or the wife’s SSN to use for reporting trust income as long as they are filing their personal income taxes jointly. If the Grantors are a married couple who are filing separately, or if the Grantors are not a married couple, then the Trust must obtain its own EIN.
Tax rules can be very complicated so be sure to get competent advice from a professional who is experienced in this area of law. The Law Offices of Okura & Associates can help you with obtaining an EIN for your trust or business if you need one.
© OKURA & ASSOCIATES, 2013