Prop trading, K-1, expenses, taxes

G

garyk

I'm trading with a proprietary firm, will receive a K-1 at the end of the year.

I understand that I can also deduct outside expenses as business expenses, but not sure how to do that. If I have it right the K-1 income/loss is reported on Schedule E (partnership income/loss). Where are trading business expenses deducted, Schedule E or elsewhere?

I've heard some firms allow submission of expense records so they reduce taxable income on the K-1, but my firm does not offer that option.

Thanks.
 
Quote from garyk:

I'm trading with a proprietary firm, will receive a K-1 at the end of the year.

I understand that I can also deduct outside expenses as business expenses, but not sure how to do that. If I have it right the K-1 income/loss is reported on Schedule E (partnership income/loss). Where are trading business expenses deducted, Schedule E or elsewhere?

I've heard some firms allow submission of expense records so they reduce taxable income on the K-1, but my firm does not offer that option.

Thanks.
More...

"but my firm does not offer that option."

Simple solution....change firms..... (just kidding with you)....

Don
:D
 
I was in a very bad situation as well... a Chicago Area prop futures firm that paid my split as an employee of the firm. Got a regular salary and was paid the balance of the split at the end of the year as it was accumulated during the course of the year in a money market account. Paid taxes as ordinary income - ouch! Served out the three year contract and walked because I appreciated the difference between blended capital gains taxes on a 1099 and ordinary income in the top tax bracket. I was one of the firm's top traders - and walked because the partners backing the firm were (and are) control freaks who would rather see a trader take a big hit with the IRS just so they can call them 'employees'.
 
I've noted some of the prior postings, and I want to chime in with my comments. I disagree with the answers that say the additional expenses not reflected on the K-1 should go onto the Schedule E. I think the additional expenses should go on a Schedule C.

My reasoning is that the Schedule E reflects figures that supposedly come off the K-1. Presumably the prior posters think the additional expenses would go into Part II "Income or Loss from Partnerships and S Corporations." But Block 27 says, "Caution: The IRS compares amounts reported on your tax return with amounts shown on Schedules(s) K-1." Nowhere in Part II [the remaining lines are 28-32] is there a line to enter expense items that were not reported on the K-1.

My point is that if the items on Schedule E had better tally with the numbers on the K-1, because if they don't, then the IRS may well trigger an audit to find out why the numbers are not the same.

Accordingly, it is my judgment that the proper place for the additional expenses to go is on Schedule C, not Schedule E.
 
Two things, make that 3.

Partnership expenses not included on a K-1 are a separate line item on Sch. E, there really is no question this is OK. Sch. C is for sole proprietorship not partnerships.

If you do put partnership expenses on Sch. C there is no penalty or problem if audited. So if you think thats best you will have no penalties.

Partnership are just about never ever audited. To play it safe claim them on schedule E. Schedule C have the highest audit rate, especially a Sch. C with a loss.
 
Quote from bone:

I was in a very bad situation as well... a Chicago Area prop futures firm that paid my split as an employee of the firm. Got a regular salary and was paid the balance of the split at the end of the year as it was accumulated during the course of the year in a money market account. Paid taxes as ordinary income - ouch! Served out the three year contract and walked because I appreciated the difference between blended capital gains taxes on a 1099 and ordinary income in the top tax bracket. I was one of the firm's top traders - and walked because the partners backing the firm were (and are) control freaks who would rather see a trader take a big hit with the IRS just so they can call them 'employees'.
More...

Bone what entity were you proposing to your old firm? What options do you have entity-wise when you are trading someone else's money? Of course you can form an exempt hedge fund, but that's expensive. You can be a prop employee and get paid in w-2 income, but you get nailed on taxes. But what else is there?

Can you form a partnership trading account? There are problems with that regarding financial liabilities (your funds in the account can be collected to satisfy the debt of the partner).

Any other options?
 
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