FYI, interesting reading for folks thinking about the LLC route.
How to Start a Washington State LLC
Small Business Guide: Start
How to Start a Washington State LLC
Small Business Guide: Start
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Professional Trader Status
- Thread starter UltradoomY
- Start date
bballshinobi
Member
If your objective is to take advantage of the corporation tax rate (21%), then make sure you set up a C Corp or an LLC that elects to be taxed as a C Corp.
An S Corp and an LLC are both pass-through entities, meaning that the profit your LLC/S Corp makes will be passed through to you and you still end up paying your personal tax rate.
Looking into taxes, if a trader is using mark-to-market, it appears they would be reporting on F4797, part II, line10. So this kinda answers my question about itemizing all trades. Definitely want a good data dump from your brokerage.
About Form 4797, Sales of Business Property | Internal Revenue Service
About Form 4797, Sales of Business Property | Internal Revenue Service
So the Corporation tax rate is flat at 21% and then you pay taxes on dividends for personal tax returns which is 20% if over $250k.
This is worse than just keeping it all personal as it 37% minus deductions.
What am I missing?
bballshinobi
Member
It all depends on your income situation and marginal tax bracket. If trading is your only income source and you don’t profit more than $200k+, then most likely keeping it personal is the most tax efficient way. If you have high income ($150k+) from other sources (job, businesses, etc.) already AND your trading profit each year is 6 figures, then setting up a C Corp can make sense.
I touched on this topic a little here:
Post in thread 'Professional Trader Status'
Professional Trader Status
https://teslamotorsclub.com/tmc/posts/5855703/
adiggs
Well-Known Member
I just read back through those posts more carefully and it has me wondering about something (as you've already done a lot more detailed analysis than I have
).If one's only source of income were trading profits, and those were high enough to push into the top bracket (somewhere north of $600k; so for this question let's pretend trading profits are >$700k with effectively no other source of income), does the C Corp still make sense? My initial thinking is that it would - in effect some of the business earnings gets paid out as a salary (turning corporate profits into personal income) and then additional earnings gets paid out at the dividend rate.
bballshinobi
Member
I just read back through those posts more carefully and it has me wondering about something (as you've already done a lot more detailed analysis than I have
If one's only source of income were trading profits, and those were high enough to push into the top bracket (somewhere north of $600k; so for this question let's pretend trading profits are >$700k with effectively no other source of income), does the C Corp still make sense? My initial thinking is that it would - in effect some of the business earnings gets paid out as a salary (turning corporate profits into personal income) and then additional earnings gets paid out at the dividend rate.
We can punch in the spreadsheet to figure this out. Let's assume you are married and filing jointly. We will use $750,000 as your trading profit and let's say it's all short term capital gains. Here are some scenarios:
Report the trading profits as short term capital gains:
- Your tax lability:
- $214,649
- Your marginal tax rate:
- 37%
- Deductions that can help you:
- Traditional IRA: $6,000, but this disappears if you or your spouse has retirement plan at work.
- Benefits:
- easy tax filing
- Drawback:
- You are over the income limit to contribute to ROTH IRA (~$200K is the limit)
- You don't get to deduct any trading related expenses
- You might lose out on some tax benefits (the potential upcoming EV credit, for example) due to high income
Report the trading profits as a business income (professional trader) on Schedule C (sole proprietor/LLC) or an LLC taxed as an S Corp
- Your tax lability:
- $214,649 income tax +$37,793 self employment tax = $252,442
- Your marginal tax rate:
- 39.9% (extra 2.9% for the Medicare tax)
- Deductions that can help you:
- SEP IRA: 20% of net income, up to $58,000
- Business expenses: get creative here - meals, car expense, computers, etc.
- Benefits:
- You can pay less taxes than the first scenario if you have a lot of expenses. You will need about $95,000 to justify paying the extra $37,793 self employment tax. Assume you set up a SEP IRA and put in $58,000, you need to have $37,000 of expenses to justify opting for this method.
- You can write off expenses
- Drawback:
- You are over the income limit to contribute to ROTH IRA (~$200K is the limit), but it's ok since you can use SEP IRA
- A bit more complicated tax filing
- LLC/S Corp setup = ~$1,000-$1,500, annual filing = $350-$500
- Your tax lability:
- $157,500 (21% corp rate)
- Depending on how the C Corp pays you, you might have tax liability on the personal side
- Interest: your marginal tax rate (0% for the first $25,100 due to standard deduction)
- Salary: 15.3% self employment tax + income tax (most likely nil since it's offset on the C Corp side)
- Dividend: 15%, but then this doubly taxed on the C Corp side (21%) then on you again, so probably not the best way
- Your marginal tax rate:
- 21%
- Deductions that can help you:
- SEP IRA: 20% of the income paid to you by the C Corp, up to $58,000
- Business expenses: get creative here - meals, car expense, computers, etc.
- Benefits:
- You determine how much "income" the C Corp pays to you each year via salary, dividend, or interest.
- You can use the C Corp to buy things you want and write them off as expenses
- In fact, you can get really creative here. You can set it up so the money you put into the C Corp is a loan, and the C Corp pays you back an amortized amount every month/year. Since it's amortized, part of it is the original capital (like your mortgage payment), so you only pay taxes on the interest part. You can start buying assets in the C Corp's name as well. The C Corp can provide the employee (you) many benefits as do the major corporations in the world: medical expenses, traveling, etc.
- Drawback:
- Things can get a bit complicated now because you have to think of the C Corp as a separate individual
- Tax filling would get more complicated; you will also want to keep good records
- C Corp setup fee = $1,000 ~ $1,500, annual filing = $350-$500
- Taking money out of the C Corp and give back to yourself can be inconvenient; You will have to plan your exit strategy.
Edit:
(1) I am not a CPA, so I am sure this post has some incompleteness or even wrong information . Please don't take what I said as an advice. Please Use it more so as a roadmap to ask YOUR CPA/tax planner questions. This is just things that I have learned through research and talks with my CPA.
(2) Long story short, a C Corp can offer more creativity and tax savings, but when it comes to enjoying the fruits of your trading heroics you will need to plan many steps ahead.
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KTC Lurker
Member
Hello All,
Updating the group following my first intro call with Anderson Advisors (Trader Taxation). I met with Mike Tracey, a sober sounding Sr. Advisor.
The call was a great high level overview of what Anderson (or similar) can provide to an investor with significant income (I have both W2 and investment), but Mike didn't have the detailed knowledge of how options are handled within his proposed entity structures to answer some of the hanging, meaty, questions this group currently has open. Below is a summary of our discussion. I'll be having a follow up call with someone more senior, Corey, in the coming days/week and will continue to update this group. Overall, setting this up won't be cheap, but the savings are apparent and Anderson encourages things that take advantage of the tax code (like section 280a), going as far as suggesting I could deduct a trip to Vegas if I had a meeting while in town. They are HQ'd in Vegas but Mike suggested this same treatment could extent to most any travel.
My ask to you all: If you are also having discussions with Tax Advisory services like Anderson, I'm trying to find the best solution and a group with a pristine reputation. I'm not sure if Anderson falters with respect to their reputation, but because their principles are well known for their YouTube series I think they attract a large volume of reviews (mostly positive, but negative reviews aren't hard to find). If we can help each other by identifying who the best of the best are among this group of advisory services, it seems like there are some healthy referral opportunities for the community as the need for this benefit expands.
NOTES:
Set up Wyoming holding company – Provides anonymity and protects assets from lawsuits
Move accounts to holding company – Holding company starts as an LLC
Make LLC a partnership – Me and corporation – income shifting into corporation
Don’t want the corp to profit, income close to zero, can only expense so much
C-corp gives best deductible expenses – audit ratio 1200% less than individuals
Expenses: Home office, cell phone, fees for trading, internet, equipment, education, travel, meetings 14x per year (sec. 280a)
w/o W2 medical, dental, vision are deductible
Platinum level: $1500 1 time, ongoing $35/mo – unlimited Q&A
Referral – Give fee credits for referrals once a “Platinum” customer
Business set up - $1500 LLC, $1500 company assistance program, $1500 corporation - $795/annual
CPA fees separate
Solo 401K - $3000 set up fee
FOLLOW UP EMAIL CONTENT:
Why work with Anderson Business Advisors?
2 min video:
To Review:
1) The Platinum membership includes a two-year tax review, KMS (Keep More Solutions), document review, and access to your power team, including me as a senior strategist, CPAs, and attorneys with non-billable hours (normally $350/hr).
Helpful videos/links:
In the future, create a C -corp with an accountable plan to reimburse your business expenses and have your rental income flow to your corporation to lower your personal taxes.
Accountable Plan for your corporate deductions:
Have a living trust to avoid probate. Probate is expensive ($15k-$30k and 18 months on average to complete).
Create WY LLC for your holding company. This will hold your safe assets, such as your savings account, mutual funds/stocks, precious metals, etc. This LLC is in WY for asset protection and privacy from outside liability (things we do as an adult that make us liable).
You can also use the WY LLC for a “friendly lien” against the equity in your home and rental properties.
401k/QRP Benefits over an IRA:
Module #3 - QRPS Best Kept Secret for IRA Investors
Opening a Brokerage Account in the WY LLC: Getting the Most Out of Your Brokerage Account
Traders
https://www.youtube.com/results?search_query=https://youtu.be/hf8vu4_UJHg
Tax deductions with Section 280A: Section 280A Deduction Explained
Tax benefits for corporations: Tax Benefits Only for Corporations
Updating the group following my first intro call with Anderson Advisors (Trader Taxation). I met with Mike Tracey, a sober sounding Sr. Advisor.
The call was a great high level overview of what Anderson (or similar) can provide to an investor with significant income (I have both W2 and investment), but Mike didn't have the detailed knowledge of how options are handled within his proposed entity structures to answer some of the hanging, meaty, questions this group currently has open. Below is a summary of our discussion. I'll be having a follow up call with someone more senior, Corey, in the coming days/week and will continue to update this group. Overall, setting this up won't be cheap, but the savings are apparent and Anderson encourages things that take advantage of the tax code (like section 280a), going as far as suggesting I could deduct a trip to Vegas if I had a meeting while in town. They are HQ'd in Vegas but Mike suggested this same treatment could extent to most any travel.
My ask to you all: If you are also having discussions with Tax Advisory services like Anderson, I'm trying to find the best solution and a group with a pristine reputation. I'm not sure if Anderson falters with respect to their reputation, but because their principles are well known for their YouTube series I think they attract a large volume of reviews (mostly positive, but negative reviews aren't hard to find). If we can help each other by identifying who the best of the best are among this group of advisory services, it seems like there are some healthy referral opportunities for the community as the need for this benefit expands.
NOTES:
Set up Wyoming holding company – Provides anonymity and protects assets from lawsuits
Move accounts to holding company – Holding company starts as an LLC
Make LLC a partnership – Me and corporation – income shifting into corporation
Don’t want the corp to profit, income close to zero, can only expense so much
C-corp gives best deductible expenses – audit ratio 1200% less than individuals
Expenses: Home office, cell phone, fees for trading, internet, equipment, education, travel, meetings 14x per year (sec. 280a)
w/o W2 medical, dental, vision are deductible
Platinum level: $1500 1 time, ongoing $35/mo – unlimited Q&A
Referral – Give fee credits for referrals once a “Platinum” customer
Business set up - $1500 LLC, $1500 company assistance program, $1500 corporation - $795/annual
CPA fees separate
Solo 401K - $3000 set up fee
FOLLOW UP EMAIL CONTENT:
Why work with Anderson Business Advisors?
2 min video:
To Review:
1) The Platinum membership includes a two-year tax review, KMS (Keep More Solutions), document review, and access to your power team, including me as a senior strategist, CPAs, and attorneys with non-billable hours (normally $350/hr).
Helpful videos/links:
In the future, create a C -corp with an accountable plan to reimburse your business expenses and have your rental income flow to your corporation to lower your personal taxes.
Accountable Plan for your corporate deductions:
Have a living trust to avoid probate. Probate is expensive ($15k-$30k and 18 months on average to complete).
Create WY LLC for your holding company. This will hold your safe assets, such as your savings account, mutual funds/stocks, precious metals, etc. This LLC is in WY for asset protection and privacy from outside liability (things we do as an adult that make us liable).
You can also use the WY LLC for a “friendly lien” against the equity in your home and rental properties.
401k/QRP Benefits over an IRA:
Module #3 - QRPS Best Kept Secret for IRA Investors
Opening a Brokerage Account in the WY LLC: Getting the Most Out of Your Brokerage Account
Traders
https://www.youtube.com/results?search_query=https://youtu.be/hf8vu4_UJHg
Tax deductions with Section 280A: Section 280A Deduction Explained
Tax benefits for corporations: Tax Benefits Only for Corporations
adiggs
Well-Known Member
Did any question of whether your trading activity level will qualify for the entity structure they are suggesting? And if so what is that trading level standard they use for qualification (it's clear that this isn't clearly resolved by the IRS) and (if you're willing) what is your own trading activity level that qualifies you?
KTC Lurker
Member
One of the videos they link to starts to explain that there are advantages to transferring your brokerage to your holding company. By doing this you work around the trading volume limits for many of the deductions that a pro trader would benefit from. My more detailed questions about the effective tax rate, state capital gains tax benefits and any further impact for meeting or not meeting trading activity requirements were said to be answered on the next call.
My own trading activity is somewhere around 55-60 contracts/week, open and close, with some type of action most days. The effective tax rate, net, vs my current situation is the open question. The other strategies will help offset more, but could also be done exclusive of any professional trader election as I understand it.
adiggs
Well-Known Member
I look forward to what you learn
The trading activity question is particularly interesting to me. The people I talked to (very briefly) asked about trades. When I contacted them a second time to ask about whether a single trade to open 10 covered calls (as an example) - is that 1 trade or 10 trades? They indicated that was not settled and for them at least, the 'safe' choice was 1 trade = 1 trade, whether 10 contracts or 1.
My understanding here is that 'safe' = the business entity survives audit. Or as they put it - they don't want to set me up to fail.
I'm at a similar activity level as you - if we're counting contracts traded instead of trade tickets then I'll clear that 700ish trades / year with ease. But trading tickets - nowhere close. Maybe 200 in my case.
KTC Lurker
Member
Thanks for that POV. Are you willing to share which advisory service gave you the 'safe' advice? I will probably want a second opinion before pulling the trigger, the question is who it comes from.I look forward to what you learn
The trading activity question is particularly interesting to me. The people I talked to (very briefly) asked about trades. When I contacted them a second time to ask about whether a single trade to open 10 covered calls (as an example) - is that 1 trade or 10 trades? They indicated that was not settled and for them at least, the 'safe' choice was 1 trade = 1 trade, whether 10 contracts or 1.
My understanding here is that 'safe' = the business entity survives audit. Or as they put it - they don't want to set me up to fail.
I'm at a similar activity level as you - if we're counting contracts traded instead of trade tickets then I'll clear that 700ish trades / year with ease. But trading tickets - nowhere close. Maybe 200 in my case.
Also, I'm not opposed to breaking my trades into smaller contract lots. Selling my cc's 5 at a time instead of in a single batch would be easy. Same with breaking apart my put orders. If I can save ~10%+ in taxes with a few extra clicks per day, count me in.
adiggs
Well-Known Member
It was the outfit I linked back on page 1. I forget the name right now but I can dig it up later (heading out the door shortly).
They do a 30 minute free consult over the phone, so they're easy to talk to about the basics and get their insight on direction. This is what they do - business entities for traders.
Great info and thank you!
I'm still stuck though as it seems the benefit of the LLC C-corp designation is minimal except for the deductions. But, I feel that if the annual profit is north of 500k then you go through all that trouble to get about 5 to 10% savings.
Does that sound about right?
bballshinobi
Member
Yea I think it's absolutely worth the trouble, because the saving is about 15% I think. If your have a high income job/business, then the savings and flexibility are even bigger.
Yes - straight tax savings is around there - however there are numerous other advantages to doing so -
The corporation can do whatever you want it to as far acquisitions for the company allowed by law and tax code - company cars, paid medical, rental properties, air planes, offices, just depends on how well you do and what else you want the company to hold for you - the CEO.....
Or you can just do it simple and take the added tax benefit.
For me, being relatively young (43) is that the company can pay for my medical insurance and fund a SEP retirement account ($58k vs. traditional 401k $18.5k) and other things like a company car.
Those things add up quickly.
I am having a more basic question around capitalizing the said LLC / C corp, when my capital is in my personal brokerage account, with the majority of it actually being long term capital gains.
Will such transfer be a taxable event, if it is possible to do it in the first place?
As an addendum, what would be the cost basis to the c corp of these assets? The original price at which I bought or the market price when I transferred it.
Will such transfer be a taxable event, if it is possible to do it in the first place?
As an addendum, what would be the cost basis to the c corp of these assets? The original price at which I bought or the market price when I transferred it.
I would imagine that would be a great question for your tax professional.
We could speculate but you need a professional opinion on this one.
Based on reading the posts...looks like I've been paying Uncle Sam way more than I should have these last few years. Own a tech / software biz and have been generating close to 1M in profits. LLC file taxes as S-Corp. Maximize everything - expenses, qualified retirement plan, life insurance, tesla under 179 bonus depreciation. For tax planning this year, my CPA told me to buy an airplane with 179 b/c I'm close to 1M in net profits outside of all the deductions/expenses. Had I had a C-Corp structure I think I would have come out better. Another gent on here advised me to start up a DAF which I have started and it def does help...
Just to add to the posts...once you have your biz setup, look into a qualified retirement plan. There are some interesting things you can do with an Actuary service. Instead of the max SEP contributions, you get to do profit sharing (based on # of employees and compensation), life insurance policies for main employees, etc. In this professional trader C-Corp, you could theoretically put your wifey as an employee and really max out if you do very well. Just sayin.
I am now looking into this setup as I also have a ton of shares and have been selling some CC on them, but do like to day trade with some "play" $. I just haven't earned more than 50-60k annually in doing regular calls/puts on other stocks outside of TSLA.
Not complaining about my first world problem, but just coming to a realization my legal structure of my business would have been better off as a C-Corp. Feel free to chime in if I'm wrong?
Just to add to the posts...once you have your biz setup, look into a qualified retirement plan. There are some interesting things you can do with an Actuary service. Instead of the max SEP contributions, you get to do profit sharing (based on # of employees and compensation), life insurance policies for main employees, etc. In this professional trader C-Corp, you could theoretically put your wifey as an employee and really max out if you do very well. Just sayin.
I am now looking into this setup as I also have a ton of shares and have been selling some CC on them, but do like to day trade with some "play" $. I just haven't earned more than 50-60k annually in doing regular calls/puts on other stocks outside of TSLA.
Not complaining about my first world problem, but just coming to a realization my legal structure of my business would have been better off as a C-Corp. Feel free to chime in if I'm wrong?
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