I recently got back into trading this August and was not prepared for dealing with capital-gain tax issues. (Previous years' gains went to cover previous years' losses. This is year#1 making Actual gains.) I rang IRS to inquire if I needed to make an 'estimated tax payment' on my gains. She said, on a $60K gain I would owe $11K on federal taxes and another $10K as 'self-employment' because I have another w2-job. She told me to file a w4 worksheet, publication 505 and schedule SE. I've read many posts that I should trade under an entity, LLC or S-Corp. I was suggested to start a 2-person LLC to reap the benefits of write-offs such as: life insurance, health insurance, self-directed IRA, etc... That a one-person LLC could not offer cuz that would still box you in as 'self-employed'. My long-time CPA is too busy to return my calls cuz he started up a new office. Therefore I'm looking into another accounting firm, someone who knows more about trader's strategies. The following are firms I am considering, and would appreciate any input or experiences you may have had with them...or anyone else. - Trader's Accounting. They charge $500 for tax preparation ($100 for fees? and $400 for 3-hours of work, approx $140/ hour). They also charge $295 for a basic corp set-up or $1595 for a detailed corp set-up. - Green Trader Tax. They charge $150 for consultant fee. Then, $900-$1200 plus, for simple return or $1250 for individual and entity returns combined. Rate is at $250 /hour. - Edaytradertax. $350 for full return including Schedule D, and I need to provide the spreadsheet. (They were 2-weeks late in responding to my 2 emails for quotes, when their site says they would respond within a day or so. They're like a 2-3 person operation, so I don't know if this could make them tough to reach in case of future urgency.) So, one of my questions is, When does it become beneficial/necessary to start-up an entity to trade from? And if buying a house can offer much deduction in itself to not proclaim as a 'professional daytrader' to offset tax burdens? I'm open to all suggestions and ideas. Much appreciated.
I was going to ask the same question today. I'm thinking of LLC, but wouldn't it be also beneficial to have a corporation which will charge that LLC a management fee. This way I can unload the LLC of some of the high tax bracket money. The question is how to use that money so that I don't have to pay corporate divident/salary tax? I thought I can use that money for equipment/data feed/accounting fees etc. What else I can use it for? How much can you justify spending? You can also pay the rest back to yourself later when your trading income is lower. In addition to that LLC + Corporation setup can save you from liability issues. Something to consider for high net worth individuals. Any thoughts?
i talk to couple accountants and read lot of info about incorporation in US. so far-i was unable to find any benefits for me(my wife is full time with W2,providing medical insurance, no mortgage, I file as unemployed). i ask same question here, numerous times, but never found anything, that convince me to incorporate. one of possible benefits(mentioned not by accountants, who suppose to be pro, but one of my friends)- that you can save some money on your first 50K,which in corp subject to 15% federal and for personal-could be higher. example-your spouse making 60K and another 100K goes from your trading. so her salary goes to 15% bracket(filed married, jointly) and yours-25%. if you trade thru corp-then first 50K will be taxed at lower rate. but again-you will be subject to double taxation imo. in case of S corp.-you must pay yourself a decent salary, so-if you making 100K and paying yourself 5K a year-i doubt that IRS will let you go with it. as for deductions-i said that before-there is really not much to deduct in trading. itâs not a manufacturing or construction business. car expenses? common. for this year i drive less that 500 miles on my old buick. last year-800.
I thought about that, but you are right, equipment/fees won't eat that much. How about fringe benefits? My friend at Google goes skiing every year at company expense. Why I can't do the same paying from my corporate account?
With a c-corp you'll do well to accumulate money until you hit the accumulated earnings barrier. After this you'll get screwed for tax. The c-corp allows for many more write-offs than an LLC though. But this will hardly compensate for the tax difference after you've crosses that AE point. You'll also get double taxed on dividends if you decide to pay yourself anything other than salary. If you pay yourself the earnings as salary then you aren't really taking advantage of the c-corp low tax rate because the corp will write off the salary expense and you'll get taxed as income. Makes no sense to pay ~30% personal income tax on $100K when you could pay 15% corp tax on that instead. Problem is that you have to get that out of the business somehow. Certain things can be used for both business and personal use that serve as a conduit for extracting value from the business without paying higher tax on it. But these thins are abused in most cases and leave the person vulnerable to tax audit issues. I once put together a big spreadsheet that showed which entity was better under various circumstances. If I can find it, I'll post it here. It was very detailed and adjusted for everything I could think of. It was very dependent on expected gains of course. For me in the end, the LLC worked out better because the c-corp was only better for the first 3 years. After that time the c-corp was taking huge tax hits. I could only sheild so much gain and then it was all over. The s-corp was the worst under almost all cases. Just remember one thing. Paying tax is a good thing in the sense that you are making money. If you aren't paying any tax, you also aren't making any money. Your best strategy if you can do it is to trade 1256 contracts only. That is by far the lowest tax you'll pay in trading for large gains. Combine that with business write-offs and you're set.
You may well be better of just filing as a trader in securities, unless there is some specific reason you need a corp. Big reason why? You pay no self employment tax, which is a large savings. And you can still deduct health insurance, offfice, hardware, software, publications, data fees, etc. etc. That's something you should check on before you go through the trouble to file for a corp and pay yourself a salary through the entity. And regarding CPA fees, you shouldn't have to pay more than 350-400 total for a return with a basic LLC or trader situation. For any decent CPA, it isn't brain surgery, although many would like for you to think otherwise. Green knows his stuff, but unless you are turning 400K profits and need shelters, etc., his fees are ridiculous.
Folks, thank you for all your responses. I'm a bit distraught from today's market. Will have to reread all your posts at another time to properly comment on them. Thanks 'gain.