To read Part 1 of this blog, which explained what an Employer Identification Number (EIN) is and how to know if your business is required to obtain one, click here  Below, you will find how to apply for an EIN and how to avoid common EIN problems.

3) You can apply for an EIN online, by telephone, fax, or mail.

• The preferred method is to apply online. The online application at www.irs.gov (keyword: “EIN”) is fast, free and very user-friendly!

Note: The online application is available for all entities whose principal business, office or agency, or legal residence (in the case of an individual), is located in the U.S. or U.S. Territories. Additionally, the principal officer, general partner, grantor, owner, trustor, etc. must have a valid Social Security Number (SSN), Employer Identification Number or Individual Taxpayer Identification Number (ITIN) in order to use the online application.

The application is available during the following hours:
Monday – Friday: 6:00 a.m. to 12:30 a.m. Eastern time
Saturday - 6:00 a.m. to 9:00 p.m. Eastern time
Sunday - 7:00 p.m. to 12:00 a.m. Eastern time   

Applying By:

• Phone: You can immediately receive your EIN by telephone. It is suggested that you first complete Form SS-4 so that you have all relevant information available. Then, you can call the toll-free number (1-800-829-4933) between 7:00 a.m. and 10:00 p.m. local time, Monday through Friday. The person making the call must be authorized to receive the EIN and be able to answer questions regarding Form SS-4.
• Fax: You can receive your EIN by fax within four business days. Click here and go to the section entitled “Where to Apply” for the fax number to send your completed Form SS-4. The fax number is available 24 hours a day, seven days a week. Remember to provide your fax number, so an IRS representative can fax your EIN back to you.
• Mail: You can receive your EIN by mail within four weeks. Ensure that the Form SS-4 contains all of the required information. Click here and go to the section entitled “Where to Apply” for the address to send your application. An EIN will be assigned and mailed to you.

4) It will take up to two weeks before your EIN becomes part of the IRS’s permanent records. You have to wait until this occurs before you can file an electronic return or make an electronic payment.

5)  Avoid common EIN problems.

• Always use the full legal name you entered on Form SS-4, line 1 and the EIN given to you, consistently on all business tax returns you file with the IRS
• If you change your business name after you receive your EIN, write to the IRS at the address where you file your tax return. The request to change your business name must be signed by an authorized person. Partnerships and corporations must include a copy of the Articles of Amendment that were filed with the state that authorized the name change.
• If the U.S. Postal Service doesn’t deliver mail to your street address and you have a P.O. Box, show the P.O. Box number as the entity’s mailing address instead of the street address.

More information about EIN’s can be found on the IRS website.

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What if you could tell your potential investor that if they choose to invest in your company, the government will exclude the entire gain on sale from tax? Through the end of 2011, this statement may be true for your company! Since 1993, the IRS has allowed a portion of gain related to the sale of a qualified small business stock to be excluded from tax and The Small Business Jobs Act of 2010 (extended through 2011 by the Tax Relief Act of 2010) increased the exclusion to 100% for stock acquired by December 31, 2011.
 
Does my company qualify? This special exclusion is for investments in qualified small business stock that meet the following specifications:

•  Domestic C corporation (S corporations do not qualify)
•  Qualifying type of business (examples of businesses not included are financial institutions, farms, professional service firms, hotels and restaurants)
•  Aggregate gross assets do not exceed $50 million at any time after August 9, 1993 and before the investment or immediately afterward.
•  At least 80% of the company's assets must be used in the "active conduct" of the business. For example, research is deemed as active conduct; however, rental of real property is not.

What investors does this target and what do they need to know? Individuals, trusts, partnerships and LLC's can qualify for stock holdings with the following profile:

A. Investors must acquire the stock as an original issue in exchange for money, property or as payment for services directly from the corporation.

B. The investor must hold the stock for at least 5 years. For example, if the investor purchases the stock on November 15, 2011 and sells before November 15, 2016, the entire gain on  salewould be subject to capital gains tax. However, if held until November 16, 2016, the entire gain would be tax free.

C. There are limitations to the exclusion for highly-successful investors. The exclusion of gain is restricted in any tax year to the greater of:

1. $10 million (or $5 million if you are married filing separately). You must reduce this $10 million by gain excluded in prior years for the same corporation; or
2. 10 times the adjusted basis of the stock sold during the current tax year

And unlike other provisions, the benefit is available to those subject to the alternative minimum tax (AMT)!  But only for purchases through the end of 2011, after that time, the benefit is not available to taxpayers in AMT.
 
Example of the benefit: An investor, we'll call him Joe, has the choice of purchasing 1,000 shares of A Company stock or 1,000 shares of B Company stock for $100,000. A Company is a qualified small business and B Company is not. Let's assume the capital gains tax is 15% and that both the companies' stock will appreciate identically. If Joe purchases A Company stock on 11/15/2011 and sells it on 12/15/2016 for $200,000 he would have a $100,000 gain that is not subject to tax, leaving him with a $100,000 return on his investment. If Joe had decided to purchase B Company instead and sold on the same day he would have a $100,000 gain that is subject to a 15% tax. This means his return would only be $85,000 [$100,000 - ($100,000 X 15%)]. As you can see, with a few extra zeros behind these numbers and as the tax rate increases, your investor could benefit substantially.  The 15% capital gains rate in 2016 assumes that the rate has not changed between now and then.

Other important considerations: Although the 100% exclusion is only good for purchases made in 2011, investors that do not purchase until 2012 will still benefit from a 50% exclusion for regular tax (not AMT). And while it is possible that Congress could extend the 100% exclusion to 2012, now is the time to get the word out before another company gets your capital!

Disclaimer: This blog is for informational purposes only. The nature of the information is intended to provide accurate and authoritative information in regard to the subject matter covered. It is provided with the understanding that if tax advice or other expert assistance is required, the services of competent professional person should be obtained.

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You may be liable for additional employment taxes if you incorrectly categorize an employee as an independent contractor.

Determining the Status of a Worker

While there is no set number of factors that can automatically classify a worker as an employee vs. an independent contractor, the IRS does offer “common law rules” regarding the degree of control an employer has over its employee or contract worker to determine their status. Facts examined to determine the degree of control fall into three categories:

1) Behavioral: How much control does the company have over how and what the worker does?

2) Financial: Who controls the financial aspects of the worker---how the worker is paid, whether expenses are reimbursed, who provides the supplies needed to complete the  work?

3) Type of Relationship: Does an employment contract exist? Are employee benefits offered? Is the work for an indefinite period or on a project basis?

To read more on how the IRS classifies employees and contractors visit the IRS website. If a conclusion regarding the status of your worker is still uncertain, you or the worker can file a Form SS-8 with the IRS to officially determine the worker’s status.

The Implications of a New Worker

Once you have determined the status of an employee or independent contractor, there are different taxes and forms required for each:

Independent Contractor

• Form W-9 to request worker’s Taxpayer Identification Number

• Form-1099 sent to worker, to report any payments made

• No withholding of pay or taxes on payments made

Employee

• Form W-2, Wage and Tax Statement, must be filed and sent to both the employee and the Social Security Administration

• Withhold federal income, social security, Medicare, and federal unemployment taxes

• Pay a matching amount of the social security and Medicare taxes

Complete details on proper tax protocol for employees can be found through the IRS website. For more information on all taxes impacting your business, visit the Stone Carlie blog.

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This repeal eliminates the need for excessive bookkeeping and paperwork required by previous 1099 reporting acts.

As a result of last year’s health care reform legislation, the simple task of purchasing a new office desk and chair for your business would have required filing a 1099 form. The Patient Protection and Affordable Care Act expanded 1099 reporting to include payments of $600 or more to corporations as well as payments made for property and other goods.

The Small Business Jobs Act made similar expansions, requiring individuals receiving rental income to issue a 1099 to any service provider, such as a plumber or contractor, for payments of $600 or more. Any individual receiving rental income “shall be considered to be engaged in a trade or business of renting property” (Sec. 6041(h)). In other words, this act extended reporting requirements to individuals who owned rental properties but were not necessarily real estate professionals.

The above acts, set to take effect in 2012, were estimated to recognize an additional $22 billion of income that was previously unreported. However, the requirements set forth were regarded by many as an unnecessary bookkeeping burden. On April 14, President Obama signed the legislation to repeal these reporting requirements.

As a result of this repeal, 1099 reporting has essentially reverted to its original state before either act could have an impact. You should continue filing 1099s as you have in the past. For example, businesses must still file a 1099 form for services rendered, but not for goods purchased. Similarly, individuals owning rental property will not be subject to the same burdens of reporting as real estate professionals.

To offset the loss in revenue resulting from the repeal, the legislation increases the amount of credit that taxpayers must repay on government provided healthcare subsidies. These subsidies are tax credits paid in advance based on the previous year’s reported income. If an individual earns more income than anticipated, and thus receives a larger subsidy than necessary, they will be required to repay at least some of that credit.

The 1099 Expansion Repeal is a somewhat complex subject matter; therefore, one should consider seeking the guidance of a skilled tax advisor. The professionals at Stone Carlie have significant expertise in all aspects of tax law and would be more than happy to discuss your business’s specific tax situation in greater detail. For more tax news impacting your business, check out the Stone Carlie blog.

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On the heels of the release of the 2010 Report to the Nations on Occupational Fraud and Abuse, there is no better time than now to evaluate your company’s internal controls on occupational fraud. The report, which is released biannually by the Association of Certified Fraud Examiners (ACFE), gathered data acquired between January 2008 and December 2009 and includes countries outside the United States for the first time.

We’ll touch on only a few of the findings, but we want to stress how critical it is to determine what internal controls your company can utilize to prevent fraud from seriously affecting your bottom line. Since we deal with many mid-market companies, we know companies of that size have limited resources to establish internal control. It’s not always easy to take a step back and identify your own company’s vulnerabilities, but it will help determine what steps need to be made.

Below are some of the highlighted findings from the 2010 Report and questions to think about. As a reminder, Stone Carlie is holding a complimentary executive briefing here in St. Louis on December 15th to help you and your company improve your internal controls to decrease the chances of fraud.

• An estimated 5% of annual revenue is how much the typical organization loses to fraud. How much would that take out of your company’s annual revenue?

• The median loss caused by occupational fraud cases in the study was $160,000… but nearly one-quarter of the frauds involved losses of at least $1 million.

• Small companies are disproportionately victimized by occupational fraud, due to the lack of anti-fraud resources. What does your company do to protect itself from fraud?

• The frauds last a median of 18 months before being detected. If you’ve had any cases of fraud in your company, how long did it take to discover these cases?

We understand the current economic climate has had a dramatic effect on many businesses, especially small and mid-size ones. But this economy has also brought with it an increased risk of fraud.

Far too many companies wait until they are a victim of fraudulent activities before implementing or evaluating their internal controls. We encourage you to take the time to assess your organization’s tools and controls on at least an annual basis. Where appropriate, you should consider engaging with a CPA firm that specializes in fraud detection and protection as that cost will be significantly lower than the cost to your business of the average fraud incident.

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