Entity Structuring Services

Put your capital in an entity!!! Traders Accounting advises clients on the most advantageous entity structure for your trading activities. If you are an investor or part-time trader, and are frustrated with the tax code's restriction on deducting investor expenses, here is your answer.

(1) Establish a legal entity, such as an LLC or corporation in your state of choice. Typically, you will register it in your home state. There are some individuals who choose to use a state such as Nevada that does not have a state corporate income tax. After completing the IRS SS-4 form, you will be issued an Employer Identification Number (EIN). That is the identifying number that the IRS uses for your new business. The next step is to transfer your brokerage account, or some portion of it, out of your personal social security number, and into the new EIN.

(2) At this point, business can begin and all "ordinary and necessary" business expenses incurred in your business of money management are 100% deductible. Of course, meal and entertainment expenses are subject to a 50% limit. It is very exciting to offset trading gains with expenses you are currently incurring, such as computers, training, subscriptions, meals with fellow traders, and internet access.

(3) An LLC is a popular choice for traders. An LLC is considered a "pass-through" tax entity. What does that mean? Simply that the LLC itself does not pay taxes at the entity level. Rather, the taxes are paid by the individual members on their respective tax returns based on their percentage of ownership.

(4) If you are in a high tax bracket, you want to lower the income reported on your personal income tax return. In such a case, you could set up a C-corporation and have it both own a portion, and act as the manager of your LLC. The percentage of ownership of the LLC will be based on your individual tax liability scenario.

(5) The corporation, as opposed to the pass-through LLC, is a taxable entity. Let's look at an example: If the corporation owns 40% of your LLC, and the LLC earns $100,000, the corporation would be responsible for $40,000 in taxable income. That currently would be taxed at the lowest corporate rate of 15%. Compare that scenario to not having a corporate minority owner and having the $40,000 added to your 31% individual tax bracket.

(6) The corporation and LLC strategy is the most tax effective way to run your trading business. We do not recommend that anyone file as a "trader in securities" on their personal return. The chances of audit are too high, and the criteria to qualify are too steep. The safest and most effective way to manage your trading capital is to place it in a LLC, with a secondary member that can either be a corporation or something else, depending on your circumstances.

Learn more: TRADER STATUS

Learn more: TAX REDUCTION PLANNING

Learn more: ACCOUNTING AND TAX PREPARATION