Pros and Cons: LLC vs S-Corp

Perhaps I'm missing your meaning but it sounds like you are saying to report the gains like any regular trader/investor and list the expenses associated with such an activity on Sch C. If that's what you meant then you have a number of problems with the biggest being the expenses being written off against zero income on Sch C. Then you have the problem, as you noted, which I didn't quote, about how the IRS views trading as a business. In short, if you have any other source of income other than trading, the IRS is highly likely to reject an application for "Trader Status" or your position that your trading is a business, which is the position you are taking once you expense trading costs on Sch C. If I'm interpreting what you've said correctly your chances of your return triggering an audit (with an unfavorable outcome) are roughly about 100%.

The best way to set up a trading entity is to go the route of a 2-member LP.

Also, as you mentioned, you need to consider state taxes such as replacement taxes. Where I live an LP, S-Corp, or LLC fall victim to a 1.5% replacement tax.

Quote from opt789:

Frankly it is simpler, as others have pointed out on this website, to just not bother with an entity. Your gains go on your taxes like anyone else, then you take your expenses on schedule C. This does tend to get more audit scrutiny though, so it is best to make sure you will fall under the IRS’s rather archaic, oversimplified and as yet still not completely understood definition of trading as a business. Whether you set up an entity or not you are still allowed to claim all the same deductions for expenses.
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Quote from uptickk:

Outside of commissions which reduce your tax base anyway not much (internet, computers, etc.). I was more hoping for the retirement benefits and any health insurance costs once I quit my full time gig.

EDIT: I should also mention I was also looking for a way to prove income as I plan on buying a home in the next year or two and have read posts about people getting denied for loans as a result of being "unemployed".
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i didn't read the whole but i would say all above depends on your filing status. including the loan for house. you have to undestand one thing-there is no denials or rejections..it's all about % on your mortgage and credit score. 850 credit score-good! 4.6%...i'm unemployed for like 10 years,my score is >800..i can get my mortgage probably for something like 0.25% above the perfect guy....
 
Quote from the1:

Perhaps I'm missing your meaning but it sounds like you are saying to report the gains like any regular trader/investor and list the expenses associated with such an activity on Sch C. If that's what you meant then you have a number of problems with the biggest being the expenses being written off against zero income on Sch C. Then you have the problem, as you noted, which I didn't quote, about how the IRS views trading as a business. In short, if you have any other source of income other than trading, the IRS is highly likely to reject an application for "Trader Status" or your position that your trading is a business, which is the position you are taking once you expense trading costs on Sch C. If I'm interpreting what you've said correctly your chances of your return triggering an audit (with an unfavorable outcome) are roughly about 100%.

The best way to set up a trading entity is to go the route of a 2-member LP.

Also, as you mentioned, you need to consider state taxes such as replacement taxes. Where I live an LP, S-Corp, or LLC fall victim to a 1.5% replacement tax.
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If you don’t like the idea for reporting your gains as anyone would and then taking your expenses on schedule C (with 0 income on that C) then you might want to run for president and disband the IRS since that is quite specifically what they tell traders, who trade for a living by their definition, to do (see below). As for a 100% chance at audit, I will just say you don’t know what you are taking about. I have done it and so have many others on this very website, your chances of getting audited are higher but that is just up from the standard low percent to start with. They are going after the mark to market traders who want to turn their losses in ordinary losses and claim big refunds against previously paid taxes. Those of us just claiming a reasonably small amount of expenses hardly justifies the cost in man hours for the audit even if they end up winning. In other words, of course your odds of an audit are higher, but more likely less than 10% if you do things right.

From http://www.irs.gov/taxtopics/tc429.html

“Traders report their business expenses on Form 1040, Schedule C (PDF), Profit or Loss From Business. The limit on investment interest expense, which applies to investors, does not apply to interest paid or incurred in a trading business. Commissions and other costs of acquiring or disposing of securities are not deductible but must be used to figure gain or loss upon disposition of the securities. Gains and losses from selling securities from being a trader are not subject to self-employment tax.”
 
You "can" get a mortgage, or you "did" get a mortgage after being "unemployed" for 10-years? If you're a FT trader I don't personally consider you unemployed but the bank does care what I think. I run an LLC investment firm so my job title is "Investment Manager." Guess what I do within that entity? You guessed it. I trade futures. I didn't tell the bank that when I applied for my mortgage. I told them I'm an investment manager, which is actually true but I trade futures for clients, which makes me a bloody day trader disguised as an investment manager :D.

I've yet to meet a day trader who was able to get a mortgage listing "trader" as job title unless they trade for Firm XYZ at the Merc. If you trade from home you're unemployed in the eyes of the bank and the government.

Quote from Bob111:

i didn't read the whole but i would say all above depends on your filing status. including the loan for house. you have to undestand one thing-there is no denials or rejections..it's all about % on your mortgage and credit score. 850 credit score-good! 4.6%...i'm unemployed for like 10 years,my score is >800..i can get my mortgage probably for something like 0.25% above the perfect guy....
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that's why i said it all depends on your filing status..and marital :p
many times you don't have to mess with LLC's and fancy titles in it. if you have a wife, and she has steady job-it's good enough for TYPICAL mortgage(unless you are planning to buy a f* estate with 25K payroll).same for health insurance. cheaper to buy from her employer than buy on your own. you know the bottom line probably better than i'm: everyone's situation is different and it is up to them to find the solution that would fit.

You "can" get a mortgage, or you "did" get a mortgage after being "unemployed" for 10-years?
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we got approved after 10 minutes talk in 2 companies and third one give us 0.25 less, without my name on mortgage,but i paid cash for my house(which i bought about year ago)..
simple math-if my house value drops 50%(which is very unlikely,but possible)-i will loose little tiny portion of my equity..but with mortgage and interest payments-it's like playing futures with 5K account and no job..one miss-and you are dead for very long time..
i prefer old fashion way,when it's comes to hard assets: cash only
 
Quote from opt789:

If you don’t like the idea for reporting your gains as anyone would and then taking your expenses on schedule C (with 0 income on that C) then you might want to run for president and disband the IRS since that is quite specifically what they tell traders, who trade for a living by their definition, to do (see below). As for a 100% chance at audit, I will just say you don’t know what you are taking about. I have done it and so have many others on this very website, your chances of getting audited are higher but that is just up from the standard low percent to start with. They are going after the mark to market traders who want to turn their losses in ordinary losses and claim big refunds against previously paid taxes. Those of us just claiming a reasonably small amount of expenses hardly justifies the cost in man hours for the audit even if they end up winning. In other words, of course your odds of an audit are higher, but more likely less than 10% if you do things right.

From http://www.irs.gov/taxtopics/tc429.html

“Traders report their business expenses on Form 1040, Schedule C (PDF), Profit or Loss From Business. The limit on investment interest expense, which applies to investors, does not apply to interest paid or incurred in a trading business. Commissions and other costs of acquiring or disposing of securities are not deductible but must be used to figure gain or loss upon disposition of the securities. Gains and losses from selling securities from being a trader are not subject to self-employment tax.”
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Does anyone have a clear answer on this?
As a trader(sole or entity), if you select MTM, you turn your trading capital gain into ordinary income. In this case, are you subject to self-employment tax?
 
Quote from millridge:

Does anyone have a clear answer on this?
As a trader(sole or entity), if you select MTM, you turn your trading capital gain into ordinary income. In this case, are you subject to self-employment tax?
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I don’t use MTM, and it adds a level of complexity where you really need expert assistance, but to answer your question:

From http://fairmark.com/traders/mtmacc.htm

“Ordinary income and loss. If you make the mark-to-market election, your trading gains and losses are converted to ordinary income and loss. You'll report the gains and losses on Form 4797 (sales of business property), not Schedule D (capital gains and losses).

This does not mean that your trading gains are now subject to self-employment tax. In a 1998 tax law, Congress clarified that although your trading income becomes ordinary income, it is not self-employment income. This also means you can't use this income to support a contribution to an IRA or other retirement plan.”
 
Quote from opt789:

I don’t use MTM, and it adds a level of complexity where you really need expert assistance, but to answer your question:

From http://fairmark.com/traders/mtmacc.htm

“Ordinary income and loss. If you make the mark-to-market election, your trading gains and losses are converted to ordinary income and loss. You'll report the gains and losses on Form 4797 (sales of business property), not Schedule D (capital gains and losses).

This does not mean that your trading gains are now subject to self-employment tax. In a 1998 tax law, Congress clarified that although your trading income becomes ordinary income, it is not self-employment income. This also means you can't use this income to support a contribution to an IRA or other retirement plan.”
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are you talking about individual or corp? same for previous poster. what type of entity you are talking about? different types can be used for different proposes.
i would talk to the pro accountant like this guy from traderstatus site.(but they ain't cheap)


http://www.traderstatus.com/whyanentity.htm

# Good way to allow you the ability to create "earned income" and thereby make tax deductible retirement plan contributions of $44,000+ each for yourself and for family members, including young children.

* Keep in mind that "earned income" is subject to Social Security taxes of 15.3% on the first $100,000 (or so) per year, per person and 2.9% on amounts over that.


# The "earned income" also allows the possibility of deducting 100% of your family's health insurance.

# The "earned income" also allows the possibility of deducting your family's medical & health expenses, if a c-corporation is formed.

* Note though, the "earned income" method can also be used to hire your spouse to legitimately perform viable services to a non-c-corporation business, including a self-employed business - a sole proprietorship securities trader.
 
Bob, I am not really sure what you are asking but it seems like I keep saying the same thing over and over. Capital gains are not subject to SE tax, period, end of statement.

If you do something, like become a member of an exchange or choose to pay yourself a salary through an entity you set up, then your capital gains are not treated as capital gains and you have earned income and are subject to SE tax on that salary you pay yourself or all of it if you are a Dealer (as opposed to a Trader). Electing MTM or just forming an entity does not automatically subject your gains to SE tax.

In other words, you choose whether or not you want to pay SE tax. The reason to do so is that you will now have earned income and can contribute to a deductible retirement plan and do various other things. On simple pass through entities like a partnership or LLC there is no requirement that you pay yourself a salary. On other entities like a C corp there are so many complexities that you can do a large number of things on how and what to pay yourself, but all that is best a addressed by an attorney.
 
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