Don, If I am a proprietary trader but not a member of an LLC but a "consultant" and I lose money (mine) what does the entity give me? Can you get a negative 1099 (I never heard of it)? It can't be a w-2. What is it? I assume as a member of an LLC, they can give me a k-1 with loses right? I know you are not an accountant and thus hesitate to give these types of answers but you seem to know the answer so could you reply and I will not hold you to the answer nor will anyone else. Thanks.
Basically you are "out of luck" - you are limited to (I think) $3,000 of losses that you can apply to earnings the next year. If you were an LLC member (with the right setup), and if you lost $50K in 2001, but made $50K in 2002, then you would have zero tax liability (of coures subject to review by your CPA). No negative 1099, and yet your firm can deduct your losses in excess of your initial contribution (if any). We really have spent a lot of time structuring our firm in the best possible way for the traders (glad to see it's paying off, I learned a lot myself over the last few years).
Don, You say that if your an LLC member with the right setup etc....... what is the right setup? Also, although with a 1099 you'd be liable for paying the FICA taxes, you would have the benefit of deducting all expenses related to earning that income.. magazines, seminars, subscription services, hardware, books, etc. On the other hand, I believe that if you're given a K-1 at the end of the year, you cannot deduct these expenses because the corporation has taken all the deductions and the amount reported on the K-1 is the Net amount that you must pay taxes on. Thanks
Our traders get the full benefit of deducting all the expenses you show above. We simply ask that they submit expense reports in detail, and we reimburse them from their account, thus reducing their K-1 earnings.
Does receiving a k-1 affect a traders ability to set up retirement plans, or are all the plans still available to use? (SEP-IRA's, etc.) Thanks
You can only "defer" earnings that you pay FICA on (15%), so it is usually better to simply invest that 15% savings yourself...this negates the purpose of the IRA's (since you are already NOT paying retirement taxes. Best of both worlds...
At bright you guys issue K-1's with traders expenses already deducted? Were you saying that if I get a K-1 for the full amount that I can't deduct after the fact on my return? Also - what do you know about setting up a corporation in order to allow yourself a keough contribution? Anything fuzzy about this? I know you are not the site accountant but any input would be appreciated. Thanks.
(non-legal response): If you take the full deduction to your K-1 then you cannot take the same deduction again. There is no real reason to set up a corporation since you are already saving the 15% SelfEmployment tax (FICA) because we chose the proper IRS election to do so. Watch out for accountants who advise otherwise, we have had several heated discussions on this, and when the numbers were crunched, opting for the individual partner won out.
what about the fact that a tax deferred keough plan can be used if a corp is opened? We have no way of putting $$ into a retirement plan that is beneficial to my taxes.
Since you are already taking a full 15% off the top of your taxes, you simply put that amount into a fund for retirement....I am not much of a believer in "plans" - I prefer to have liquid $$ or securities in accounts that I plan on using for retirement..and this accomplishes the same without all the fees.