Which EIN should you use with your IRA-LLC, 401k-LLC, IRA-Owned LLC, Checkbook IRA?
Self-Directed IRA (SDIRA) investors that have checkbook control ask the following question: What is the correct way to complete Form W-9 for an IRA-LLC? Whose TIN should I use when investing with an IRA-LLC? Should I use my SSN when investing with my IRA-LLC? Whose EIN should EIN should be entered on a W9?
To properly answer these questions, we’ll take a comprehensive look at:
- What are TINs? What are EINs? What are SSNs? What purpose do these serve in tax reporting?
- How is a Single-Member LLC, or SMLLC, treated by the IRS? What is a disregarded entity for tax purposes?
- When will you encounter this question when using an SDIRA-LLC to invest?
- Which Tax IDs come into consideration for a Checkbook IRA? Which Tax ID should be used for a Checkbook IRA? Which Tax ID may be used for a Checkbook IRA? Which Tax ID should not be used for a Checkbook IRA?
- Why is it important to provide the correct TIN?
- Why is there so much confusion about this subject?
We’ll then provide a summary of this very detailed and technical post. (For the short answer to the questions, just scroll down to the end.)
Note: The focus of this post is IRA-Owned LLCs, 401k-LLCs, and QRP-LLCs with only a single member – the IRA, QRP, or 401k. IRA/QRP/401(k)-Owned LLCs that have multiple members are treated as partnerships for tax purposes and are not disregarded. Similarly, an IRA/QRP/401(k)-Owned LLC that has elected corporate treatment with the IRS is not a disregarded entity, and is not the focus of this post. Regardless of the treatment of your Retirement Account LLC, this post should be very helpful and informative… so read on!
TIN, SSN, EIN, ITIN: The Tax ID Alphabet Soup
The IRS needs ways to identify taxpayers, to track who has earned income, who must file tax returns and forms, who owes taxes, etc. Therefore, an identification system is required for tax purposes.
The IRS uses a Taxpayer Identification Number (TIN) to administer and enforce tax compliance for each taxpayer. In order to track and trace income, every taxpayer must use a TIN when filing tax returns and other forms with the IRS. Similarly, when other parties are required a tax form with the IRS with regard to a taxpayer – such as Forms 1099-MISC, 1099-B, 1099-S, and K-1 – the TIN of that taxpayer must be included.
There are multiple TINs that are used by the IRS, and they are issued either by the Social Security Administration (SSA) or the IRS:
- Social Security Number (SSN): SSNs are issued by the SSA, not the IRS. But, the IRS “piggybacks” on the SSA and uses SSNs to identify individual taxpayers.
- Employer Identification Number (EIN): An EIN, also referred to as a Federal Tax ID, is issued by the IRS to identify business entities.
- Individual Taxpayer Identification Number (ITIN): An ITIN, issued by the IRS, is a tax processing number only available for certain nonresident and resident aliens, their spouses, and dependents who cannot get an SSN.
When will a Checkbook IRA, Checkbook QRP, or Checkbook 401k investor be asked to provide an EIN for an investment?
IRS Form W-9, Request for Taxpayer Identification Number and Certification, is used to provide a TIN to the person that’s required to file an information return with the IRS with regard a taxpayer. Some common examples of information return filings for which a W9 will be requested:
- Form 1099-S, Proceeds From Real Estate Transactions: The person responsible for closing a real estate transaction must report the sale or exchange to the IRS using this form. If your Checkbook IRA or other Checkbook Retirement Account sells real estate, the settlement agent will request a TIN for tax reporting using Form 1099-S.
- Schedule K-1, Partner’s Share of Income, Deductions, Credits, etc.: A partnership uses Schedule K-1 of Form 1065 to report the portion of partnership income and expenses allocated to each partner to the IRS. It is also provided to each partner for reporting on its own return. If your Self-Directed IRA-LLC, 401k-LLC, or QRP-LLC is a limited partner in a hedge fund, real estate syndication, crowdfunded investment, or similar pooled investment vehicle, you’ll be asked to provide a TIN for tax reporting on Schedule K-1.
- Form 1099-B, Proceeds From Broker and Barter Exchange Transactions
- Form 1099-DIV, Dividends and Distributions
- 1099-MISC, Miscellaneous Income: If your Checkbook IRA/LLC, 401k/LLC, or QRP/LLC owns residential real estate, the property manager will request a TIN for purposes of reporting rents paid to you, using form 1099-MISC.
Note: Many of the foregoing forms are not even required by the IRS when the taxpayer is an IRA.
What is a Disregarded Entity For Tax Purposes?
When filing tax forms and determining which TIN to use, you must ask: Who is the taxpayer for purposes of the tax-reporting form?
While determining who the taxpayer is may seem straightforward, it is not always so. There are some entities that do business, but are not taxpayers in the eyes of the IRS.
A business entity may be recognized for legal purposes, but not for tax purposes. Such an entity is disregarded for income tax purposes – a disregarded entity. A disregarded entity does not have any income tax filing requirements or any income tax liabilities. It is an entity that is completely disregarded by the IRS for income tax purposes. The IRS does not expect to receive any income tax returns or income tax payments from a disregarded entity. In other words, a disregarded entity is not a taxpayer.
Now, you may be thinking that disregarded entities represent the “cutting-edge” in tax strategy, a way to do business without having to deal with the IRS – but that’s not the case, unfortunately. When an entity is disregarded by the IRS, all the revenue and expenses of the entity are reported on its owner’s tax return and any tax owed on that income is a liability of that business owner.
What is a common Disregarded Entity?
A Single-Member Limited Liability Company (SMLLC), which is an LLC that has only one owner, is a disregarded entity by default. This means that unless an election is made with the IRS to request corporate treatment, a SMLLC is not a taxpayer and its income is reported on its owners tax return.
In the words of the IRS:
“If a single-member LLC does not elect to be treated as a corporation, the LLC is a “disregarded entity,” and the LLC’s activities should be reflected on its owner’s federal tax return.”
Therefore, when a SMLLC is asked to provide its Tax ID it should not provide its own EIN. Rather, it should provide the TIN of its sole member.
In the words of the IRS:
“For federal income tax purposes, a single-member LLC classified as a disregarded entity generally must use the owner’s social security number (SSN) or employer identification number (EIN) for all information returns and reporting related to income tax. For example, if a disregarded entity LLC that is owned by an individual is required to provide a Form W-9, Request for Taxpayer Identification Number (TIN) and Certification, the W-9 should provide the owner’s SSN or EIN, not the LLC’s EIN.”
Many Self Directed IRA-Owned LLCs are SMLLCs, having only a single owner. As such, an IRA/LLC is a disregarded entity in the eyes of the IRS. The same is usually true for QRP/LLCs and 401k/LLCs.
Which TIN should be provided on Form W-9 when the investor is Checkbook IRA-LLC, Solo 401k-LLC, or QRP-LLC?
There are, potentially, 4 options to choose from:
- SSN of the SDIRA-account holder
- EIN of LLC
- EIN of the SDIRA Custodian or Solo 401(k) Plan EIN/QRP EIN
- EIN of the SDIRA that is specially obtained from the IRS
The IRS is very clear in all their guidance that the TIN reported on any tax form should be that of THE TAXPAYER. So, the question we must ask is: Who is the taxpayer with regard to a SMLLC?
The answer is: The owner of the SMLLC is the taxpayer. The SMLLC is a disregarded entity that is not a taxpayer.
- Based on the foregoing, the correct TIN to provide on a Form W-9 that’s requested of your Checkbook IRA-LLC or Checkbook QRP/401k-LLC is that of the SDIRA custodian or Qualified Retirement Plan (QRP), respectively. The retirement plan is the sole owner of the LLC and is the taxpayer that’s ultimately responsible for any tax filings or tax liabilities that may apply.
For additional confirmation of the foregoing, please see IRS Form W-9 and its accompanying instructions by clicking here.
Your SDIRA custodian may have a special reporting EIN that it uses specifically for SDIRA account investments. You should contact your SDIRA custodian to request the correct EIN.
- SDIRAs that have had a 990-T filing requirement may have their own unique EINs, distinct from that of the SDIRA custodian. In such cases, the SDIRA-specific EIN may be provided, rather than that of the SDIRA custodian. However, an SDIRA should obtain its own EIN only if it files Form 990-T for UBIT – not for the purpose of completing a W9.
- The EIN of the IRA-LLC or 401k-LLC is the incorrect TIN to provide, as it is not the taxpayer. Furthermore, providing the LLC’s EIN may lead to confusion with the IRS, resulting in unnecessary heartache.
- The SSN of the SDIRA account-owner is the wrong TIN to provide, as the income of the SDIRA should not be reported on the account-owners’s personal tax return. Furthermore, providing your SSN on the W9 makes it far more likely you’ll be hearing from the IRS, which will be expecting to see that income reported on your Form 1040, Individual Tax Return.
Why is it important to provide the correct TIN and taxpayer information of Form W9?
To minimize the likelihood of IRS inquiry and intervention. If the wrong TIN is provided on the W9, and subsequently income is reported to the IRS on a 1099 using that EIN, the IRS will be expecting to see that income reported on your personal return. When it’s not reported there, you may get a friendly letter in the mail requesting that you pay taxes on that income. That is a path you don’t want to go down.
Why is there so much confusion and misinformation about SDIRA-LLC EINs?
Many, including SDIRA custodians, overlook the distinction between legal structure and tax reporting. They are under the impression that if an investment is legally titled in the name of the IRA-LLC, then all tax reporting must be done in the name of the LLC and using the LLC’s EIN. That is erroneous, as we’ve outlined above, and can lead to unintended adverse consequences for all parties.
IRA/LLC, 401k/LLC & QRP/LLC Tax ID: Summary and Conclusion
The upshot of all the foregoing is that the Tax ID for an IRA-LLC owned investment is the same as that for a non-checkbook SDIRA. The LLC that is owned by the IRA is completely disregarded by the IRS.
Based on our analysis following are some line-by-line tips for correctly completing a Form W9 for IRA-LLC & 401k-LLC investments.
- The underlying SDIRA or QRP is the taxpayer with regard to the SMLLC investments, and its EIN should be used.
- Form W-9, Line 1: Enter the name of the retirement account, as appropriate
- Form W-9, Line 2: Enter the name of the SMLLC
- Form W-9, Part 1: Enter the Employer Identification Number of the taxpayer listed on Line 1. This will be either the SDIRA custodian’s reporting EIN, the SDIRA-specific EIN if one was obtained for 990-T reporting purposes, or the 401k/QRP EIN.
In addition, the following tips may prove very helpful:
- Forms 1099-MISC, 1099-B, 1099-INT and 1099-DIV do not have to be issued to retirement accounts, per IRS instructions to those forms. Share that with whoever is requesting a W9 to, hopefully, prevent the filing of those forms, altogether.
- If your SDIRA custodian insists that you use the IRA-LLC’s or 401k-LLC’s EIN, recognize that this is very common in the SDIRA industry. We have found that when an SDIRA investor is well-informed they can get what they want.
At ReSure LLC we do our utmost to educate self-directed investors and self-directed custodians about the correct way to complete Forms W9. This is just one of the many examples of why niche expertise is required when self-directing and we are committed to providing that to our self-directed investor & checkbook-control clients.
Whether you’d like to use an IRA, QRP, or 401(k) to invest in real estate, tax liens, private loans, cryptocurrencies, mortgage notes, deeds of trust, merchant cash advance, crowdfunding, precious metals, or something novel that we haven’t seen yet… we’d be glad to get your positioned to invest with total control.