Since I was quoted (and mis-quoted) so many times on this thread....let me try to explain. Retail traders who have capital gains, and all the other reporting hassles to deal with are not even in the same category as EXEMPT PROFESSIONAL TRADERS, who's trading firms choose the proper exemption and categorization. All "business people" (including traders) must pay Self Employment Tax, unles their firm chooses this election. I am not giving legal or tax advice, and I suggest that you contact a serious trading tax professional. Green Trader Tax (Bob Greeen) is pretty good. Don
i was under the impression that the key factor is how you are treated by your firm. If you have money at risk and receive either a k1 or 1099-b your trading profits are not subject to SE tax. If you receive a salary or 1099-misc. then those earnings are subject to FICA, etc. at least this is how i understand it.
I did a fair amount of study some time back so you will need to get a current opinion before you act. I think the confusion here lies to some degree in terminology. If you are a non-professional trader; meaning you are not licenced and not with a pro firm and have NOT made a "Trader" declaration with the IRS, then to the IRS, You are NOT a trader, but rather an Investor - active as you may be and hence the use of the Schedule D. I don't know how you handle the taxes if you are a Declared Trader - which allows you to use Mark to Market accounting and there is the vague reference by the IRS for "substantial activity" and how that has been managed by the IRS. (if you take a few month break to figure out what went wrong and get your head straigntened out, does this disqualify your declaration) With all these variables, my CPA suggested I skip all the controvery and establish a Chapter S corp 2 years ago and it has gone very well. The record keeping is super easy and so are the corp. tax returns. The annual balace and all expenses flow thru the corp to my personal tax return and there is no FICA. The Prop. firms give you much the same (and certainly easier) by allowing you to submit your expenses for reimbursement against your account and then the reduction is reflected in your dividend distribution. So you don't really show any expenses on your tax return, but they were deducted from your winnings prior to disbusement.
I don't see that taxes would be different at all under either of these options. If we make the assumption that you would not lose trader status when you take a vacation I see no benefit. I'm not sure but I seriously doubt that would cause you to lose trader status. Are there any other benefits to an S corp? I'm thinking your CPA wanted to make $1,500 to $2,000 for the "favor" of setting up the S corp. It is quite profitable for the CPA than just a consultation.
The IRS Code dictates what you can do and as a previous post pointed out, CPA's are very conservative on what will trigger an audit. No disrespect, but CPA's don't set up corporations, that's a legal thing. I bought a $25 piece of software at Office Depot and it prepared all the declarations and then I took it to the Sec. of State and registered it (another $150) so it was no big bucks for me. The tax returns were easy enough for me to figure out, so I've always done my own taxes. I don't necesarily recommend Corp S. but it does have the lowest statistical audit percentage. I see alot of companies that are LLC's but I don't know the significance of that.
The audit feature is nice, especially nice I'm not very organized. I have the all the stuff to back up my tax returns but it is all spread throught the house, it would be a nightmare to piece it all together. The only thing that sux is that the state of TN doesn't recognize S corps. It is one of the few states that still don't, damn I'm lucky. I stand corrected, thanks for the info.
What do you mean "TN doesn't recognize S corps."? An "S Corporation" is a =federal= (not state) matter. All that's required is (a) the criteria be met and (b) the corp elects "S" status (as in Subchapter S of the IRC).
I was sure that I saw that somewhere on the internet but it was definitely wrong. From TN gov't website: IRS Publication 589, "Tax Information on S Corporations," can give you more information. Note: S Corporations must be incorporated under the laws of TENNESSEE. Therefore, they are subject to state corporate excise (income) taxes and state corporate franchise (company value) taxes. This part I don't like is: Therefore, they are subject to state corporate excise (income) taxes and state corporate franchise (company value) taxes. There is no "individual" state income tax in TN. This would seem to be a drawback for a TN S-corp.
Basically, Illinois treats S corps in the same manner; there is both a franchise tax and a "replacement" tax. That, however, doesn't change the fact that state law has nothing whatsoever to do with a corporation's =status= as an S corp; it's simply an election for pass-through treatment made at the federal level. I have to say, though, that the statement on the TN web site is somewhat puzzling since, technically, a corporation cannot be an S corporation (or a corporation at all, for that matter) =until= the entity has been formed under state law. They're sort of putting the cart before the horse.