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".
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".
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