There is a cap on the self-employment tax. It is only on the first 80k or so of income. And it is not totally useless, since you do get social security based on it. Nevertheless, you would need a very high expense structure for it to be worth it. I would try to put more energy into turning more trades into long-term capital gains.
Pros and Cons: LLC vs S-Corp
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After searching the internet for idea and reading through this threads, I feel the right entity or no entity is really individual case by case.
For someone who has another full time job (pay 30% income(W2)tax), incorporate his/her trading business like C entity may be a good way to save tax, otherwise all trading gain passing through to individual return will pay >30% tax. For the C corporation you get benefit of only 15% tax for the first $50k profit and can also keep profit inside C. Considering too much bookkeeping work related to C corporation, Entity setup as LLC with C tax selection can be the structure to go. Any traders here have actually done so?
There is no tax advantage to trading under an LLC versus declaring sole proprietorship income on a 1040 without any formal business structure.
You use an LLC to shield your personal assets from legal tort claims.
The only tax advantage you can find for trading outside of the 'ordinary income' tax bracket structure is to use regulated futures and claim blended capital gains treatment.
You do not get unlimited deductions just because you have an LLC or another corporate structure - an AMT will kick in, or deductions beyond a certain threshold get disallowed. Every year, I bump into that threshold where in essence above a certain income level deductions like mortgage interest, charitable contributions, and the like make no difference on the tax due.
Agree completely re: professional tax advice; don't take anything at face value that you read off of an internet forum. I also agree that what most CPA's claim they know about trading tax treatment is suspect and often incorrect. I did have to file an amended return one year because a CPA made a mistake.
You use an LLC to shield your personal assets from legal tort claims.
The only tax advantage you can find for trading outside of the 'ordinary income' tax bracket structure is to use regulated futures and claim blended capital gains treatment.
You do not get unlimited deductions just because you have an LLC or another corporate structure - an AMT will kick in, or deductions beyond a certain threshold get disallowed. Every year, I bump into that threshold where in essence above a certain income level deductions like mortgage interest, charitable contributions, and the like make no difference on the tax due.
Agree completely re: professional tax advice; don't take anything at face value that you read off of an internet forum. I also agree that what most CPA's claim they know about trading tax treatment is suspect and often incorrect. I did have to file an amended return one year because a CPA made a mistake.
There are cases where the IRS said the owners salary was too low on a sub S Corp and the owner lost the self employment tax break they thought they were getting.
Now for you guys who trade large and have big goals of going public someday then a regular C Corp it is easy to sell shares and the IRS is much less stringent on the salary the C Corp pays you. Somebody said earlier in this thread they took all their meals as a deduction through their Corp well that seems crazy to me, risk losing an audit to save a few hundred in tax bills. I know guys who have gotten away with paying almost all their personal bills as expenses through a Corp but they have a higher risk tolerance than I do.
I built an addition on a guys house a few years ago, over $100,000 dollar job and every penny paid to me was through his Corp.
Now for you guys who trade large and have big goals of going public someday then a regular C Corp it is easy to sell shares and the IRS is much less stringent on the salary the C Corp pays you. Somebody said earlier in this thread they took all their meals as a deduction through their Corp well that seems crazy to me, risk losing an audit to save a few hundred in tax bills. I know guys who have gotten away with paying almost all their personal bills as expenses through a Corp but they have a higher risk tolerance than I do.
I built an addition on a guys house a few years ago, over $100,000 dollar job and every penny paid to me was through his Corp.
Also the IRS looks at a single member LLC as simply gaming the system, they can say your a sole proprietor.
If this is what you really plan to do for a living an LLC is the way to go, just have more than one member, and don't go crazy on the deductions. There is no limit on loss write off, also you don't have to worry about trader tax status when you set up a legal entity, I'm not cretin of that better check.
"Also the IRS looks at a single member LLC as simply gaming the system, they can say your a sole proprietor."
I would have to politely disagree. As a sole proprietor, you can take the same deductions for business expenses as an LLC. Again, the only true advantage for an LLC is shielding your personal assets from business activity related tort lawsuits and claims.
I would have to politely disagree. As a sole proprietor, you can take the same deductions for business expenses as an LLC. Again, the only true advantage for an LLC is shielding your personal assets from business activity related tort lawsuits and claims.
I think the confusion comes from the idea that trading through entity(LLC) will give you trader status automatically. According to some CPA site, this notion is not correct. You still have to meet IRA trader status requirement no matter what entity you use. In that sense, business expenses deduction will be same for sole proprietor and single member LLC if you file Schedule C. For multi-member LLC and C tax selection entity, you file 1120 and could have more freedom to report business expenses(a lot of gray areas). Again, I am not a CPA, but have a desire to educate myself as much as I can regarding tax related issues as a trader.
I did not say you could not take the same deductions, I simply said a single member LLC may cause issues. IMO best to go with more than one.