My understanding is that if you trade under LLC (S Corp) with an intent to have an income to contribute for retirement plans, it needs to come only from trading income (and not investment income). Further the trading income is on profits for trades held for less than about 30 days. Anything above is investment income. Is this correct? If so, how does does one (and IRS) figure out trading income (other than manual calculation). From the brokerages, I can only see short term and long term gains and short term span from 1 day to 1 year. No option for < 30 days.
In order to have a retirement plan, you must have earned income. Investment income is not earned income. So in this sense it is correct that in order to contribute to a retirement plan, the business entity must be generating compensation that is subject to social security and medicare taxes. However, you have not indicated whether you plan to set up a company retirement plan, or whether you are just talking about contributing money to an IRA. If you have another job (a "real" job), then you can contribute to an IRA based on that income, up to the maximum annual contribution. It does not matter exactly where the money is coming from. And having earned income from the LLC will not allow you to contribute more to an IRA. It might even reduce the amount you can contribute, because when your income is too high, there are contribution limits that kick in. You are correct that there is no easy way to determine which securities were held for less than 30 days. You have to manually review each transaction. It is possible that third-party software such as Tradelog could provide a filter that would help. Or if you can download all of your transactions into Excel, you could probably write a script or a formula in Excel that would look at the date values, and filter those transactions for which the amount of time between opening and closing is less than 30 days. I am not proficient enough in Excel to do that, but I'm pretty sure it can be done. But you need to do more research and probably talk with a tax advisor who has experience with professional trading. I am a tax advisor, but trading is not my area of expertise. I am not familiar with the 30-day rule, but that doesn't mean anything. I will offer the following advice: If your intent is to have the LLC set up a company retirement plan such as a 401(k), then you will definitely need the services of a firm that specializes in creating and managing retirement plans for small businesses. If you are just talking about contributing to an IRA or a SEP, you can do that on your own. But as I mentioned earlier, having earned income from trading will not increase the IRA contribution limits. If you already have salary or wages from another job, that will allow you to contribute to an IRA, regardless of where you get the money. Are you absolutely certain that you want the LLC to be an S-corp? An LLC, if it has only one member, is generally taxed as a sole proprietorship, and that means that you would simply put the trading income on Schedule C, and it would be treated as earned income. If the LLC has more than one member, then it is generally taxed as a partnership, the trading income would flow to Schedule K-1. If the member is identified as an active member and a general partner, then it is considered self-employment income, and that is also earned income. Choosing S-corp status is an optional election that is available to an LLC. But one of the major advantages, and in many cases arguably the only advantage, is that S-corp status allows you to treat some of the company's income as investment income instead of earned income. And that seems to be the opposite of what you are trying to accomplish. In an S-corp, you get to designate a certain portion of the income as salary to the shareholders who are actively working and running the business, and the rest is treated as investment income. The portion treated as investment income is not subject to social security and medicare tax, and that is considered a major advantage to many taxpayers. But if your goal is to maximize retirement contributions, it may not be a real benefit. Also, when you have an S-corp, the shareholders who are actively working in the business must receive a salary. They must be employees of the company. The company must set up a full-blown payroll system, and the company has to withhold federal and state taxes. The working shareholders are genuine employees, and they get a Form W-2 at the end of the year. They cannot get paid as independent contractors with a 1099-MISC (or 1099-NEC, as the new form is called). And the salary cannot be reported on the Schedule K-1. Only the investment income portion appears on the K-1. The salary must be processed as payroll, and it must be reported on Form W-2. These rules apply to all S-corps, regardless of what kind of business they are in. Active trading is not an exception. The only way an S-corp can avoid having employees and payroll is if all the income is investment income. But again, that is the opposite of what you are trying to accomplish. Are you sure you want all the baggage associated with payroll?? You may be able to achieve your objective by leaving the LLC in its default status, i.e., a sole prop if it has one member, or a partnership if it has multiple members. BMK
Your understanding is incorrect as you are combining 2 separate and distinct businesses. One is trading as a business, which is profiting from short term (holds of less than 31 days) price movements, and two, a business of investment management. The legitimacy of trading as a business in the eyes of the the IRS is determined based on facts and circumstances, case-by-case, with only a handful of formal bright-line tests, which includes timely and proper qualifications and elections. This hazy IRS soup is known as Trader Tax Status (TTS). To keep things simple, it is best to NOT commingle these two businesses. Investment management has a different set of tax issues than a trading business. I'll leave THAT discussion for another time. Anyway... as @BMK stated, earned income is necessary for retirement plan contribution. Capital Gains are NOT earned income. In a trading business, capital gains can not be converted to earned income without qualifying for Trader Tax Status. This has nothing to do with trading through an entity or trading as an individual. Entities and individuals can have TTS. If you are unfamiliar with TTS, here are 2 links... Robert Green is THE expert on trader taxation. A quick text blurb. https://greentradertax.com/trader-tax-center/trader-tax-status/how-to-qualify/ An 11 minute video. https://greentradertax.com/about-us/videos/trader-tax-status/?t=m FWIW, I trade through a TTS S-Corp. The entity pays me W2 income. At year end, as an employee, the entity issues me a W2. As an S-Corp shareholder the entity issues me a K1. I have had this setup for years!
%% Actually I think most of your comments apply to roth/back door roth.BUT i'm not a CPA; call 4 of them-that way you may get an accurate answer.May want to get a 2nd brokerage; 52 weeks is not much for trades/investments. I got TTS thru my cpa;but not sure that matters much; I use roth………………. IRS has plenty of discretion+they audit more on a % basis/more you make more they audit that income/investment group. IRS also audits people/corps more that give away 10% or more; but that is easy to prove.
Thank you for the reply. I am trying to do same set up as you. I started LLC, planning to make it SCorp (and perhaps M2M). Can I send you a direct message, if it is ok with you? Thanks for your help.