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Benefits of trading through an LLC.
- Thread starter chrisjs87
- Start date
I have posted this before, but since I think some of the posts in this thread could be misinterpreted, I will post something again.
1) You don't need a business entity to deduct any and all trading related expenses. You do need to qualify as having trader status as apposed to be an investor. Some believe that forming a entity is a good way to go, I agree, but which entity - LLC, partnership, s-corp, etc, - will depend on your particular situation.
2) Nothing changes capital gains into ordinary gains or income where self employment taxes (social security, medicare) are due unless you choose to make it that way. Whether you have a entity or just claim your expense on Schedule C with no entity, you don't owe any self employment tax. If you are a member of an exchange, or choose to pay your self a salary through your entity then self employment taxes are usually due.
3) Mark to market is an official election you make with the IRS, and should be done with the help of a professional. There is little use for it if you are a profitable futures trader, but it can be very beneficial if you are a stock trader. But MTM is a completely separate thing from qualifying as a trader with trader status. Obviously you would want to be confident that you qualify for trader status before choosing to elect MTM. You elect MTM with the IRS, you qualify for trader status by trading enough - trading needs to be regular and substantial.
1) You don't need a business entity to deduct any and all trading related expenses. You do need to qualify as having trader status as apposed to be an investor. Some believe that forming a entity is a good way to go, I agree, but which entity - LLC, partnership, s-corp, etc, - will depend on your particular situation.
2) Nothing changes capital gains into ordinary gains or income where self employment taxes (social security, medicare) are due unless you choose to make it that way. Whether you have a entity or just claim your expense on Schedule C with no entity, you don't owe any self employment tax. If you are a member of an exchange, or choose to pay your self a salary through your entity then self employment taxes are usually due.
3) Mark to market is an official election you make with the IRS, and should be done with the help of a professional. There is little use for it if you are a profitable futures trader, but it can be very beneficial if you are a stock trader. But MTM is a completely separate thing from qualifying as a trader with trader status. Obviously you would want to be confident that you qualify for trader status before choosing to elect MTM. You elect MTM with the IRS, you qualify for trader status by trading enough - trading needs to be regular and substantial.
thanks for the input.
the big thing for me was no se tax, but after review its seems neither investor, trader, or trader m2m are liable for se tax only the guys on floor of the exchanges pay it.
i trade options frequently and was suprised when i sold to open bought to close and sold to open again a while back that they said wash sale, it was small but had me thinking what if that wasn't small in the future.
i hadn't even thought about wash rules on options so that's a big deal for me too. so i would think most people would want trader status if they could achieve it at a minimum. then m2m on top if it helps.
i guess if you get trader status with m2m it makes plugging into software all yours gains and losses easier since wash sales absolutely would not apply.
the big thing for me was no se tax, but after review its seems neither investor, trader, or trader m2m are liable for se tax only the guys on floor of the exchanges pay it.
i trade options frequently and was suprised when i sold to open bought to close and sold to open again a while back that they said wash sale, it was small but had me thinking what if that wasn't small in the future.
i hadn't even thought about wash rules on options so that's a big deal for me too. so i would think most people would want trader status if they could achieve it at a minimum. then m2m on top if it helps.
i guess if you get trader status with m2m it makes plugging into software all yours gains and losses easier since wash sales absolutely would not apply.
A single member LLC by itself is not what an independent trader wants. You want an SMLLC that elects to be taxed as an S-corp. Otherwise your trading business goes on Schedule C and that is a dynamite way to get the IRS' attention. With the S-corp election the business is on an entity return and gets passed through to Schedule E which is what you want if you're an independent trader. You pay payroll taxes on whatever you pay yourself in salary but NOT on distributions of S-corp profits. Also your salary is deductible as a compensation expense when figuring S-corp income/loss. This thread is ripe with awful advice and it looks like some people already paid for it.
Quote from ferrycorsten:
A single member LLC by itself is not what an independent trader wants. You want an SMLLC that elects to be taxed as an S-corp. Otherwise your trading business goes on Schedule C and that is a dynamite way to get the IRS' attention. With the S-corp election the business is on an entity return and gets passed through to Schedule E which is what you want if you're an independent trader. You pay payroll taxes on whatever you pay yourself in salary but NOT on distributions of S-corp profits. Also your salary is deductible as a compensation expense when figuring S-corp income/loss. This thread is ripe with awful advice and it looks like some people already paid for it.
How many years have your traded like this?
The only problem i see is that you have to pay yourself a 'reasonable salary' which is subject to SE taxes unless i am mistaken and you can pay 100% distributions not subject to SE taxes. Otherwise sounds nice. I'll ask a CPA. thanks.
Quote from metameta:
How many years have your traded like this?
The only problem i see is that you have to pay yourself a 'reasonable salary' which is subject to SE taxes unless i am mistaken and you can pay 100% distributions not subject to SE taxes. Otherwise sounds nice. I'll ask a CPA. thanks.
You're correct about the "reasonable salary" but to define that without reading 100 court cases is pretty tough. Also keep in mind that ordinary income from S-corps increases your basis, which helps distributions to be treated as return of capital.
how about this situation?
1. I have a full time job, which the max social security tax has been paid.
2. I opened an LLC to trade - the goal is to shield gains using SEP IRA instead of paying taxes at higher bracket.
3. I didn't elect S-corp, instead the LLC is pass through, I take a lumbsum "Owner's draw" as the source of SEP-IRA.
Could someone comment on this strategy?
1. I have a full time job, which the max social security tax has been paid.
2. I opened an LLC to trade - the goal is to shield gains using SEP IRA instead of paying taxes at higher bracket.
3. I didn't elect S-corp, instead the LLC is pass through, I take a lumbsum "Owner's draw" as the source of SEP-IRA.
Could someone comment on this strategy?
As a single member LLC, the IRS may question your situation since your LLC is on a schedule C and not a separate-entity return. Schedule Cs look bad because gains or losses from trading are reported on schedule D, leaving only your business expenses on schedule C, which will be a net loss. Just make sure you are able to prove trader status if the IRS inquires.
Also S-corps are pass-through entities as well. The difference here is that making the election to be treated as an S-corp allows SMLLCs to file a business return.
Also S-corps are pass-through entities as well. The difference here is that making the election to be treated as an S-corp allows SMLLCs to file a business return.