permissible deductions?

Discussion in 'Professional Trading' started by msushi, Mar 25, 2011.

  1. the1

    the1

    First a couple issues.

    1. Trading must be your primary (and possibly your only) source of income. If you have other income it's quite possible the IRS will not grant your application for Trader Status. If you create an entity and the income from this entity is from trading, and possibly only trading, then you don't need to apply for Trader Status for this particular issue.
    2. As a person who has been trading for several decades and who has BA in finance, and a Master's degree in Computational Finance, with a concentration in Trading, I can tell you that the undergrad degree will do absolutely nothing to improve your skills as a trader. This is an important point because of what I'm going to write next. Here is your support for the deduction:

    Under §162(a), there shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business.

    Under Reg §1.162-5 expenditures for education which are not expenditures of a type described in paragraph (b)(2) or (3) [discussed only briefly below] of this section are deductible as ordinary and necessary business expenses if the education—

    (1) Maintains or improves skills required by the individual in his employment or other trade or business, or
    (2) Meets the express requirements of the individual's employer, or the requirements of applicable law or regulations, imposed as a condition to the retention by the individual of an established employment relationship, status, or rate of compensation.

    Under Reg §1.162-5(a) the education expenses can not be the type described under Reg §1.162-5(b)(2) or (3). Reg §1.162-5(b)(3)(i) states nondeductible educational expenses are expenditures made by an individual for education which is part of a program of study being pursued by him which will lead to qualifying him in a new trade or business. Since your primary business is that of a Trader the pursuit of a finance degree to support your primary line of work is a business deductible expense.

    The part you need to be concerned about is Reg §1.162-5(1) from above, which reads: "Maintains or improves skills required by the individual in his employment or other trade or business."

    Whether the IRS is aware of this point, or would contest it, is unknown but there is a way to cover your butt by doing some investing within the entity, in addition to trading, and demonstrating that you are using fundamental analysis to make your trading decisions, which is what you will be taught in a program of finance.

    Disclaimer: The above should not be considered a professional opinion and you should consult with a CPA or Tax Attorney before making any decisions. As a word of warning, a deduction of this nature will almost certainly trigger an audit. You need to have your ducks lined up before you take this deduction. I would recommend you spend $125 and do a 1/2 consultation with an accountant who specializes in trading such as www.greencompany.com. You're more than welcome to send him the information I have provided. Good luck!
     
    #11     Mar 26, 2011
  2. the1

    the1

    Can you be more specific and give an example?

     
    #12     Mar 26, 2011
  3. the1

    the1

    You don't happen to know the name of the court case, or the name of the petitioner? I'd like to read this case.

    EDIT: Her name is Cynthia Hess. It's all over the internet but I can't find I cite for the case. I'd love to read the transcript.

     
    #13     Mar 26, 2011
  4. msushi

    msushi

    Thanks for your insight. So it looks like it MAY be possible to qualify for the college degree deduction (either a masters in finance and/or an mba if my edge lasts long enough to give me that many years for possible deductions) but I will definitely go through this with a certified trader tax accountant (since my only motive of going to get additional degrees would be because they are tax deductible anyways)

    If trading is my only business, could I for example open a bar or a venture capital company and deduct losses from those ventures with no maximum amount from my total tax obligation?
     
    #14     Mar 26, 2011