Advantages of Trading in an LLC

A Limited Liability Company has many advantages such as simplicity to operate, reduced corporate formalities and minimal documentation requirements. Structured as a “flow-through” entity, the LLC’s profit and loss will flow to each partner’s return. The characteristic of each income type will stay intact as it flows to each return. This enables a trader who has a capital loss carry forward in their personal name to be offset by future LLC capital gains. In addition, each partner will be able to take advantage of the beneficial 60/40 split (60% taxed as long-term capital gain and 40% taxed as short-term capital gain) of 1256 contracts.

The LLC also avoids the 15.3% employment tax. Thus, you can take cash out of the LLC without having to draw a salary! In order to receive benefits from trading inside an LLC, it should always be structured and taxed as a partnership.

Disadvantages of Trading in an LLC

The major disadvantage of using an LLC for your trading business is that you need a partner. You may also want to consult with our tax professionals to make sure there is no adverse state tax on an LLC where you are domiciled.

Click here for more information about "trading as a business".

Advantages of Trading in a “C” Corporation

A “C” Corporation can have many advantages for traders. This “separate” taxpayer is taxed at a 15% rate on the first $50,000 of net profit. This would allow a trader who is in a high personal tax bracket to have his $50,000 of trading profit to be taxed at 15% instead of his personal rate; thereby, paying fewer taxes.

In addition, a “C” Corporation is the only entity that may deduct 100% of out-of-pocket medical expenses through a “medical reimbursement plan”. Yes, you read that correctly! A corporation can deduct 100% of out-of-pocket medical expenses! Compare this to the inferior 7.5% of your AGI reduction you must take as an individual on your personal return.

Disadvantages of a “C” Corporation

A “C” Corporation could impose disadvantages on the unsuspecting or ill-advised taxpayer. The possible tax traps that one may step into are the accumulated earnings tax, double taxation on dividends, and the additional employment taxes (Social Security) which would be required to be paid on a salary.

When it comes to capital losses and 1256 contracts, the "C" Corporation also isn’t very favorable. A "C" Corporation cannot deduct ANY capital losses – and you thought the $3,000 personal limit was bad. The "C" Corporation also does not receive any benefit from a long-term capital rate. Therefore, the 60/40 split of 1256 contracts that is so beneficial to an individual has the possibility of being wasted at the corporate level.

What’s more, a corporate owner needs to be mindful of the activity that generates corporate profit. In the event that 60% or more of corporate profit is from passive income (as defined in IRC code section 543), the Corporation will be considered a Personal Holding Corporation and subject to an additional 15% tax on the undistributed personal holding company income.

Click here to learn more about "trading as a business".

Like a Defective Seatbelt: Your Limited Liability Company’s False Sense of Security!

Mass Production of Well-Marketed Fallacies

The extremely fashionable and single most powerful asset protection tool, the Limited Liability Company… Like most Americans, there is a good chance you have repeatedly heard advertisements about the benefits of an LLC to protect your most precious assets. Yet have you ever taken the time to research how an LLC stands up to IRS and/or civil court proceedings? In all likelihood, probably not… why would you? Your illzoom.com or “online document mill” sales rep is looking out for your best interest.

If LLCs Don’t Provide Asset Protection, Then Why Are They So Popular?

Since its first inception more than twenty-five years ago, the LLC has become the standard, one-size-fits-all, recommendation for asset protection. However, celebrity status was not achieved until 1997 when the IRS enacted the "Entity Classification Election” or most commonly referred to as “check the box” election. This Federal tax change prompted most US States to create or modify their existing Limited Liability Company Act to follow suit. This groundbreaking regulation enabled newly formed LLCs the ability to elect to be taxed as a Sole Proprietorship/disregarded entity (IRS Form Schedule C), Partnership (IRS Form 1065), or Corporation (IRS Form 1120/1120S). Following this development, the entity gained unprecedented popularity.

Simple Planning is Simply Placing Your Assets at Risk

As simplistic as creating an LLC with your state may sound, many LLCs lack the legal substance and documentation required to be considered a separate legal entity. What’s more, in many states your LLC may not provide any protection at all, regardless of how detailed your documentation may be.

If you currently rely on an LLC for asset protection, ask yourself the following questions:

1. Do you have an operating agreement? If not its kind of like buying a car without any locks.
2. If you do have an operating agreement was it drafted specifically for you? Or is it a generic boilerplate with fill-in-the-blanks? You really do get what you pay for.
3. Are you and your spouse the only LLC owners? If so, chances are its no going to provide any asset protection.
4. Are you the only LLC manager? The one with sole authority over the account? The recent trend for creditors is to hit you with an asset freeze. If you are the sole signatory on the account, you could be in big trouble.
5. Have you made distributions from the LLC to yourself? Currently there is a one-hundred million dollar case where creditors are trying to make the LLC owners pay back the LLC for the value of any distributions and by the way, a number of the LLC owners have already agreed to pay the funds back!
6. Do you believe your LLC would protect you in bankruptcy?
   

Don’t allow an IRS audit or civil court proceeding to wipe out the assets inside your trading company. Shield your business from predatory creditors and the IRS!

To ensure your legal entity is treated separately for asset protection and tax purposes, you must show that the business is not an alter ego. In other words, you must be able to show that the business operates separately from its members, shareholders, officers, and directors. This is accomplished by continually following all corporate formalities and providing proof through written documentation.

Watch the video with Lynnett Gallagher, AZCLDP as she explains the importance of maintaining corporate records.

Reaction to Taxes, the Vicious Cycle of Costly Procrastination.

Proactive planning now could dramatically reduce your trading taxes.

Unfortunately, most Americans plan to fail, by failing to plan now! This astonishing habit will continue as people sit back and relax as the tax deadline has come and past. Costing thousands in over-payments to the IRS for traders, investors, and small business owners.

We have all been there, enduring the anxiety of April 14th because we have done nothing for tax planning. Unfortunately, most taxpayers will wait until after January 2011 to start planning only to find that its too late. Why? Any legitimate tax planning must be done early enough in the tax year to be effective and after year end, its too late. Unless of course you want to make an IRA contribution, but again that is not effective planning nor does it dramatically reduce your taxes.

We have worked with thousands of day traders and investors this last tax season. Our busiest day for phone calls and emails is April 14th!

Here are the most common questions we were asked;

• Can I file for the Mark to Market election for my 2009 trading?
• Can I establish a corporation or LLC for my trading activity and make it retroactive for 2009?
• What do I need to do to ensure that I meet trader status for 2009?
• What deductions may I take for 2009 and how should I keep track?
• Can I draw a salary out of my business now and claim it for 2009 for contribution to a retirement plan?
• I made money on Spot Forex, what do I need to do to take advantage of the 1256 tax treatment?

The Mark to Market election was the only question that could have been answered "Yes" however, there was not enough time before the deadline it implement. If you were to compare tax planning to auto insurance; you total a new car you just paid $75,000 cash for and out of the excitement, you failed to obtain insurance. How would your State Farm agent reply when you ask about a new policy? I am sure you would get the same chuckle from the insurance agent that most get from appealing to the IRS.

More to Life Than Tax Planning

All of us become wrapped up in our lives. After all, there is more to life than tax planning. We would rather spend our sparse free time with family and doing the things we enjoy. You do not have to sacrifice your free time to drastically and effectively cut your tax bill!

Our team of professionals have meticulously studied the tax code and trader tax cases to reflect the changes for 2010.

Practical Tips for Avoiding the April Rush While Reducing Your Trader Tax Bill

If you were to ask my children how many seasons there are their answer would come with no hesitation, FIVE – spring, summer, fall, winter, and tax. They know the drill – long hours and full concentration on reducing our client’s tax burden.

Should the Tax Season Be About Rush, Rush, Rush?

The IRS thrives on trader tax complexity and as a trader; your largest expense is your tax bill. As my children even say, haste makes waste. So why risk thousands of dollars rushing through such complexities? Here are some useful tax tips you should know as the deadline approaches rapidly.

Extension of Time to File Your Tax Return

Is it an IRS "red flag" to file an extension? One fact you must remember when filing an extension is that the request is an extension to file your taxes, not to pay your taxes. The IRS is very generous when it comes to giving you extra time to file your return. In fact, with an extension, you can wait until October 15th to file a personal tax return. HOWEVER, if you have not paid your taxes by April 15th (regardless of an extension), you will be charged interest AND penalties. Yes, you heard right. PENALTIES. The failure to pay penalty (different from the estimated tax penalty) is .05% of the tax not paid, for each month (or part of a month) it remains unpaid, up to a maximum of 25%.

These penalties are like bad investments, taking time to stop and think will help you avoid them. If an extension is necessary and you are concerned about owing tax, prepare an estimate of what you think you owe. If you are still unsure, take the time to have our professionals estimate the amount you owe. Also, remember that making an overpayment could be a great investment. After all, it carries a guaranteed 4% return!

Stimulus! Stimulus! Stimulus! What Do These Government Tax Credits Mean to You?

The year 2009 was a whirlwind. The government, in an effort to help the economy, has created, modified, and extended several credits and deductions which could possibly mean thousands of dollars for taxpayers. Why leave money on the table? These credits and deductions could range from home ownership, education, energy, to dependents. Take the extra time to learn from our professionals about what credits and deductions are available to you. Don’t miss out because you were rushed to file your tax return.

Does the IRS Owe You Money?

If you know the IRS owes you money or believe you may be entitled to a refund, why wait? Cash out your investment today! On request, our CPA’s will complete your return before the April 15th deadline to ensure the cash hits your pocket ASAP.

No Other Accounting or Trader Tax Firm in the Country Can Match the Expertise of our CPAs!

With a large government deficit, stay clear of the IRS cross hairs. Now more than ever it’s extremely important to get proper tax advice; although most CPAs won’t admit they are not always equipped to help day traders or investors. Our tax professionals have studied the IRS code and trader tax court rulings for years and are determined to slash your tax bill!

Register today for our trader tax preparation service and we will waive the $100 setup fee. Finally, rushing that actually saves you money!

Why do taxes on Forex seem so foreign?

It is no wonder that the taxation of foreign currency trading is so confusing. Understanding the fundamentals of the currency markets are confusing alone without the right trading education. Add a little dash of “modern day” taxman bureaucracy and voila, you have two very different tax code sections. Knowing the specifics about what you trade will better help you determine how your Forex trades are taxed.

Spot Forex

Spot Forex is where one trades the actual currency for immediate delivery and the transaction is settled "on the spot". This type of trading, by default, falls under IRC Section 988 and is not subject to short-term or long-term capital gains tax, but instead is reported as “other income” and is subject to your ordinary income tax rate. Since IRC Section 988 gain or loss is taxed as ordinary income, you are able to overcome the $3,000 dollar a year loss limitation.

Any person, regardless of trader status, has the option to opt out of Section 988 tax treatment and into IRC Section 1256 tax treatment. This election must be documented on a proactive basis and may not be a universal election made at the end of the year. Opting out of Section 988 could be a good decision in the event that you are in a profit position. If you generate a loss, you will still be bound by the $3,000 a year capital loss limitation.

Futures on Forex

Those who buy Forex futures contracts are subject to IRC Section 1256 tax treatment. These transactions receive a split tax treatment of 60/40, where 60 percent of the gains are taxed as long-term gains and 40 percent of the gains are taxed as short-term gains, regardless of the holding period. This is reported on schedule D and is subject to the $3,000 a year loss limitation. The benefit of IRC Section 1256 contracts are the long-term capital gains tax treatment on 60% of your profit. Currently this tax rate for individuals is anywhere from 0% to 15% tax.

No Other Accounting or Trader Tax Firm in the Country Can Match the Expertise of our CPAs!

With a large government deficit, stay clear of the IRS cross hairs. Now more than ever it’s extremely important to get proper tax advice; although most CPAs won’t admit they are not always equipped to help traders or investors.

Our tax professionals have studied the IRS code and trader tax court rulings for years and are determined to slash your tax bill with our Trader Tax Preparation Service!