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Trading through a company you own has many tax and IRS benefits. Here Robert Green discusses which entity is best to set up as a trader.
My guest today is Robert Green, and we’re talking about trading through an entity, and what benefits that gives you as a trader. So, Robert, I know a lot of traders are out there trading on their individual tax returns, individual bank accounts, everything individual accounts. What benefits do I get from trading within a company?
Well, it looks a lot better to the IRS if you’re claiming trader tax status, which is the main reason why you would form an entity. It’s a little more complication, very little more cost. Just as convenient to run. You put money in, you take it out at will. It looks a lot better to the IRS. The sole proprietor trader files a Schedule C, which always draws IRS attention, but the trader draws even more attention because there is no revenue on the Schedule C; it’s on other tax forms like Schedule D, so you could be very profitable and appear to be a losing business. That’s not the case with an entity, where it’s all consolidated and you look profitable.
What type of entity, you know, S-corps, C-corps, LLCs, what am I looking at?
C-corp’s not good, double taxation, no lower 60/40 tax rates. You can’t get the benefit of the losses right away. You want a simple pass-through entity. Husband and wife couple, we recommend a general partnership. We like that partnership tax return; it’s the most flexible. We can take expenses after year-end with UPE, unreimbursed partnership expenses, and it just looks the best for the IRS. They don’t need an LLC; that costs more. In states like California it’s $800 more per year for the LLC, but if you’re not married, what do you do? Single member LLC, and elect S-corp status. The S-corp return is very good, it’s a little different from the partnership return, there are some pluses and minuses, but they’re minor. Bottom line, it’s a simple past-through entity and it’s very inexpensive to form.
Now, what if I’m not a full-time trader, and I don’t have trader status, but I still do a lot of volume. Is an entity still beneficial?
We used to say ‘not so much’, but this year we say ‘yes’, because individual securities traders struggle with the new cost basis reporting on that form 8949. Six of them reconciling to very error-prone 1099s. Entities don’t file form 8949. You can extricate yourself from that mess.
…and how about the benefits of say, health insurance or retirement plan, those all come with it, right?
Those are the biggest benefits of an entity. Glad you brought it up, Tim. The entity pays the trader a fee, an administration fee to create earned income. The trading gains are not earned income. Great. No self-employment tax. You pay a small fee, pay a little self-employment tax, FICA and Medicare, but save much more in income taxes. Anywhere from $2,000 to $17,000 more. Big money in your pocket.
Do I actually pay myself a paycheck? Do I set up payroll within the entity to pay myself?
An S-corp should do payroll, but a partnership is more flexible, as I said. It can pay you a simple fee that you report on a 1099-Miscellaneous at year-end.
Alright, your Web site’s got a ton of great information on this. Give that to us so we can go there.