Trader Taxation / CPA Experiences

Discussion in 'Taxes and Accounting' started by limitdown, Sep 30, 2002.

  1. CPA's are sometimes lawyers, as such, their success is dependent upon the illusion of "creating value". Perhaps they point out areas and methods of structuring your trading business for maximum tax advantage, perhaps they do better than your own efforts at record keeping, perhaps...

    Many CPA's and their firms take on an arrogance that's legendary and has a rather pungent odor. Many times we as sophisticated traders are not new to reading and understanding complex theorum, trading styles, taxation issues and business formation issues. Hence the "services provided" are invariably over priced, given that they are no longer "specialty items/services".

    Trader taxation is a new paradigm given the explosion of self employed individuals who've racked up substantial gains/losses in the recent years. The IRS has moved to address these issues and further clarified these categories so that more persons who have engaged in this endeavor would have taxation relief on varying scales. Simply put, what was not clear is becoming more clear and routine. What was the exclusive realm of the "specialist CPA" with their fancy websites and expensive retainer memberships and their over wordy Active Trader Magazine articles, has become part of the normal CPA domain.

    Given that time has "normalized" Trader Taxation Issues, have you considered employing a local CPA who no doubt can acquaint themselves with Trader Taxation issues for far less that these high profile "web enabled" CPA's?

    What were your experiences with your CPA?, particularly with these "web enabled CPA's"?

    What would you feel comfortable recommending or discussing or sharing?
  2. Swish


    I worked on trader taxation issues for several months before recently deciding what type of business entity I wanted to trader under and what CPA I wanted to use. It was a frustrating process with several twists and turns.

    I have made several observations that are relevant:

    1. Most local CPA's give you blank stares when you start talking about things like Mark to Market and Trader Status. Even though I would have preferred a face to face relationship with someone, I didn't want to pay for a CPA's education at my expense.

    2. There is a wide diversity of opinions about what is possible or legal among the so-called experts you mention.

    3. Many of the CPA's mentioned on ET in other threads are single acct shops and you have a lot of trouble reaching them in short order - I got several "he'll be back in town next week" responses when I called these places.

    4. One of the largest firms on the web has taken to solicitation via free conferences on trader tax issues, led by folks who are sincere and pleasant - but are not CPA's and have limited background when questioned beyond the scope of the conference.

    5. Without much effort, you can get yourself talked into a complex multiple entity setup that is not needed, or at least not needed for a while (until you're more successful).

    My recommendations for folks working on this area of their trading include:

    1. Do your homework and know what you're getting into. These are not areas that you should rely on one CPA's advice without checking here and there to check on the validity of what he says.

    2. Don't turn your accounting over to somebody else entirely and think "I don't want to mess with this stuff." You'll easily end up in the group of trader's who've run into tax trouble or weren't prepared for taking full advantage of trading losses.

    That's my two cents worth......

  3. Minime


    Here's my two cents on CPA's (after being one for 10 years): They love to create value by designing complex entity structures to exploit loopholes or things the common man wouldn't think of. This creates perceived and sometimes actual value for the client, and also creates work in the future for them (filing returns, etc.).

    This is all well and good, and many people save tons of money, but when the IRS calls for that audit one day, look out! Even if what you're doing is legally Kosher, that doesn't mean the IRS sees it that way. For the CPA though, this is gravy on the potatoes, because you're going to need them to help explain why you have a complex multiple entity structure, giving your CPA more fees than what they earned from all your other work combined.

    And the IRS isn't exactly full of rocket scientists either. Their general lack of knowledge, beyond the average 1040-ez, causes your professional services bill to skyrocket when they spend 3 months at your place of business questioning your CPA.

    My advice is if you have a choice, keep it simple and avoid non-pass through entities (corporations), and avoid paying self-employment taxes for the privalege of contributing to a qualified retirement plan.

    :D :D
  4. What we need is Turbo Tax for Traders
  5. Swish


    Good Luck.....
  6. i had a net operating loss last year that i needed to carry back to the previous year.. not wanting to use one of the web based specialty CPA's i went to a local guy.. he kept all my paperwork for 3 weeks then called me 2 days before April 15 to let me know he couldnt help me.. but he recommended one of the largest CPA firms in town.. so, i drop my paperwork off there and go back the next day for an appointment.. the CPA didnt understand the whole mark to market election thing and thought i had to file the 3115 at the same time as the election.. so, he wanted to amend my previous years return, adding a 3115.. because the 3115 would have been late it would have cost 700 dollars processing fee.. also, he said my previous years state taxes couldnt be used for the NOL purposes because it was part of a "personal deduction" when the instructions clearly allow for "State tax on business profits".. well, i didnt know what the truth was at the time, but my impression of the guy was that he was shooting from the hip.. so, i declined to let them prepare my taxes.. when i got home i emailed and they recommended one of their tax guides which pointed out the proper way to file the 3115.. so, if i had listened to the CPA's advice i would have had to amend my previous return which would very likely result in an IRS review, i would have paid 700 dollars to file a form that i didnt need, and since i wouldnt have filed the 3115 on time this year i wouldnt have been able to carry my loss back for a refund..

    so, i dont prefer local guys anymore.. actually, ill probably just do my own taxes unless i get into something really complicated..

  7. I think this thread is headed in the right direction with substantive and qualified commentary. We will all certainly benefit by these discussions.

    One thing is certain, is that all the members here that actually do trade are qualified to share their trader tax comments here.

    Please keep it going.

    Trader tax software is a novile idea, which might just be followed through on. Turbo Tax and Tax Cut Professional (for business) did an excellent job.

    The other commentary regarding carry forward (which is presumed and expected) but carry back losses is a very tricky area indeed.

    The other comment regarding the IRS not having rocket scientists is partly true, however, what is certain is that if you can't explain the concept to a college student accountant, then it won't fly at the IRS, without significant cause for worry about future audits or whatever. Keeping it simply is not the only objective, it has to be logical.

    After all Uncle Sam's hand is out for his share, and only the fool hardy try to cheat someone that has unlimited resources. Besides, he's there to help you when things aren't working either (i.e. carryback losses and increased refunds).

  8. You've stated the core of the trader tax question. Most traders want to max out their retirement contributions and social security. However, how do you do that without paying self employment tax? With a pass thru entity, the limited members don't pay SE tax, but if you are the general partner (the one doing the actual trading) you will pay SE tax. True or not?
  9. There are alternatives. The method of discovery is to first ignore what every one is saying and simply ask the IRS to explain your choices like you were a six-year old. Then ask more than one operator (customer service rep) on the 800 line, at different times. Average out their responses, and then verify it yourself.

    Simply put, SEP-IRA, KEOGH and other methods with/without SE taxes do exist. Ever consider Annuities?
  10. I haven't heard good things about that website and those guys, too arrogant and expensive. What were your experiences?
    #10     Oct 1, 2002