Turning K-1 into Earned Income?

Quote from pdwst33:

As for why I would want to turn K-1 into earned income...basically there is a large portion in the Green Trader Tax book that speaks of this. It says with solely K-1 income, you can't set up a retirement plan like a mini 401k, deduct health insurance premiums, deduct home office expenses, etc, etc. My accountant agrees with the findings of the book. Am I saying this is the way to go? Not at all..that's why I'm posting the question here, to see if anyone actually has chosen one path or the other and with what level of success.
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I like Bob Green, and if you look on the back cover of his book, you will see that I was glad to endorse him. Most of his "edge" is designed for retail traders, and for the most part, a "sub-llc" is of little net value to our people.

I need to correct one other thing. Our traders are taxed on what I call "triple net" - meaning that at year end, they turn in all their "outside" expeneses (computers, broadband, home office, etc.), and we reduce their K-1 amount by that amount (thus triple net, because all the primary expenses are handled by Golldman Sachs, on their daily sheets). The 15% you save could be put under the mattress and work better than most alternatives.

All that being said, Bob is the best in the business for retail traders.

Don
 
Why don't u just open an account with a prop firm as an LLC, vs. individual and aviod all this mumbo jumbo. Think u just need a S24 license. Prop then pays ur LLC and you can do all u aimed for.

Quote from pdwst33:

Working for a "Prop Firm" LLC that distributes a K-1 to me. An accountant I've just met with suggests that I create a single member LLC, let's call it XYZ Capital, which will be a sub LLC of the Prop Firm LLC. Since the K-1 is not earned income, the accountant also suggests creating a single member "Management" LLC...let's call it XYZ Management. He then said that the Capital LLC would "pay" the management LLC a "fee" which would convert the K-1 into Earned Income.

Does anyone have a set-up similar to this or has heard anything along these lines? I believe the Robert Green Trader Tax book suggests a similar set-up. I'm wondering how successful, or what obstacles people have had with these circumstances. Thanks.
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I think there is some confusion here and maybe we can get Don to chime in as a former CPA.

The alternative structure to an LLC would be to set up an S-Corp right Don? Here, you could pay yourself a salary and also setup a generous 401k retirement plan. Your salary would be ordinary income. The downfall to this is you would pay taxes twice. Your corporation pays taxes off the top, then you would be taxed on your salary. But maybe you can set this up in a state where there are no corporate taxes. Don, I'm reaching here....help!
 
pd - you are quoting Bob Green quit a bit. Did you contact his firm and they provide these suggestions to you or was this a local CPA? I ask b/c if you are going to go off a Bob Green book, I would hope you are smart enough to contact the author about this book and not some local hack.
 
Quote from Dustin:

Hi Don,

What is the benefit to the firm reducing the K-1 vs. the accountant just deducting the expenses later?
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Just simplicity, less likely to be red flagged by IRS, etc. How often does the IRS question the broker or employer who sends you a W-2, 1099, or K-1? Not very often.

Don

(Disclaimer: This is all personal opinion, and does not reflect opinions of Bright Trading or any of its' affiliates).
 
Quote from Maverick74:

I think there is some confusion here and maybe we can get Don to chime in as a former CPA.

The alternative structure to an LLC would be to set up an S-Corp right Don? Here, you could pay yourself a salary and also setup a generous 401k retirement plan. Your salary would be ordinary income. The downfall to this is you would pay taxes twice. Your corporation pays taxes off the top, then you would be taxed on your salary. But maybe you can set this up in a state where there are no corporate taxes. Don, I'm reaching here....help!
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speaking about S corp-few days ago i been talking with some CPA.i told her that i'm preparing my taxes by myself and all of my profits mostly short term capital gains, which i declare on Schedule D.
she claim, that IRS may challenge me after i report and paid my taxes, that since i'm unemployed and my source of income only those gains from trading that i'm self employed and force to pay FICA taxes and report your gains on Schedule C. i personally never heard about such thing, filing my taxes by myself over last...maybe 5-7 years. anyway-she propose to open S corp, and receive those capital gains as distributions, while pay some FICA taxes on formal salary of let say 4K a year, we talking about 50-60K in trading profits per year. + she also noticed some deductions benefits.
when i comeback home, and did some research i actually doubt, that there is any significant benefits for individual trader to form S corp and trade\receive distributions from it. not to mention that most likely IRS will make you pay to yourself reasonable salary(20-30K on 60K profits), deductions in trading(let's be honest) are close to zero. what you going to deduct? Internet + couple computers? that’s about it. i'm receiving health benefits from my spouse employer. and don't forget that on S corp you have to do estimated taxes(which mean more visits to CPA).
so my question to fellow ET members -is there any significant benefits for individual trader, who trade his own capital to create S corp and trade thru it instead just trade thru brokers individual account and report your gains\losses as usual, on Schedule D of your personal taxes?

i think she just trying to get new client, by offering me such advise.

Thank you and sorry for off topic
 
Quote from Maverick74:

I think there is some confusion here and maybe we can get Don to chime in as a former CPA.

The alternative structure to an LLC would be to set up an S-Corp right Don? Here, you could pay yourself a salary and also setup a generous 401k retirement plan. Your salary would be ordinary income. The downfall to this is you would pay taxes twice. Your corporation pays taxes off the top, then you would be taxed on your salary. But maybe you can set this up in a state where there are no corporate taxes. Don, I'm reaching here....help!
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You answered your own question my friend. The downfall to this is you would pay taxes twice. Your corporation pays taxes off the top, then you would be taxed on your salary.

And, if in S-Corp, you have to pay FICA on that portion. I hate to say "trust me" - but we spent a lot of time and money to set up the best possible plan for our traders....maybe not perfect, but seems awfully good to me.

I have actually started closing some "entities" - just don't get the benefits of the old days (cars, etc.).

Even if no State taxes, IRS will still grab a big chunk, no matter what.

Don

And, to Bob: This is where you should consult someone like Bob Green, as a retail non-licensed trader subject to "trader taxation". IMO.

(Disclaimer: This is all personal opinion, and does not reflect opinions of Bright Trading or any of its' affiliates).
 
Quote from pdwst33:

I read/own the Green book, but haven't contacted the firm....yet.

I did contact a local CPA as well.
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I would suggest if you have questions about topics in a book and the author has a firm that does this stuff, START there.
 
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