Leading Tax Accounting Company Answers to Questions on Day Trading Regulations, IRS Rules and More

What do I do when I receive an IRS notice?

The most important thing to remember is take action immediately; do not wait until the last minute. Often, the longer you wait to take action the more difficult it is to resolve the issue. Generally, the first action we recommend is contacting your accountant. Your accountant can discuss the options you have, and help you determine the best way to precede with the notice.

What do I need to file the market-to-market election?

If you are filing the Market-to-Market Election for an entity that has been in existence and has filed returns previously or for a Schedule C, business you must make the election by April 15th of the year preceding election. If you are filing the Market-to-Market Election for a newly established business you need to make a note in your records within 75 days of starting business, and file the election with the first tax return. If an extension is filed for the first tax return, the election must also be attached to the extension.

How does capital gain/loss generated in my LLC taxed as a partnership effect my Individual Income Tax Return?

If an LLC taxed as a partnership generates capital gain/loss it passes that gain to the members and the members report the gain/loss on their Individual Income Tax Returns as capital gain/loss. This capital gain/loss is netted against other capital gain/loss the individual has; including capital loss carry forwards. If the net result is a gain the individual pays tax on the net gain. If the net result is a loss, up to $3,000 is deductible against other types of income and the remaining is carried forward as capital loss. Find more IRS rules for day trading and links to IRS resources.

What is a schedule K-1?

The Schedule K-1 is used for returns that pass income from an entity to an individual. Examples of returns that generate K-1s are Partnerships, S Corporations, and Trusts. The K-1 shows the individuals' share of the income/loss generated by the entity and is used by the IRS to verify the information reported on the Individual Income Tax Return.

As an experienced tax accounting company, what accounting method should I choose?

The most common accounting methods for traders are cash, accrual, and mark-to-market. No one of these methods is better than the other, as the best method depends on the circumstances and preferences of the individual.

Under the cash method of accounting, income and expenses are generally recognized when cash actually changes hands. For example, you order supplies and receive them on 12/10/2010 but you do not actually pay for the supplies until 01/03/2011. You would not report the expense on the income tax return until 2011.

Under the accrual method of accounting, income and expenses are generally recognized when they are incurred. For example you order supplies and receive them on 12/10/2010 but you do not actually pay for the supplies until 01/03/2011. You would report the expense on the 2010 income tax return.

The mark-to-market method of accounting is similar to the accrual method when recognizing most types of income and expense. However, the mark-to-market method of accounting is different regarding how the gain/loss from trading is calculated and reported. The mark-to-market method of accounting can have a significant impact on the taxes due. So, we recommend consulting your accountant prior to making the mark-to-market election.

When is a gift reportable?

The rules related to Gift Tax are complex. Generally, if the value of the gift you give is $13,000 or less the gift does not have to be reported. However, due to the complexity of the rules surrounding gift tax it is recommended that you contact your accountant prior to making a gift.

Does filing an extension for an income tax return raise a "red flag" to the IRS?

There is no evidence that filing an extension is a "red flag." A hastily prepared and possibly inaccurate return filed by the original due date is much more likely to be audited than a carefully prepared one filed by the extended due date.

What are the advantages of e-filing my tax return?

There are several advantages to e-filing your income tax return. According to the IRS, e-filing increases the accuracy of processing your return, reducing the chances of receiving a notice form the IRS. It also increases security, reduces the time it takes to receive your refund, and allows you the ability to get verification the return was filed within 48 hours of filing.

Is there an additional fee to e-file my return?

Traders Accounting does not charge a fee to e-file your return.

What are the tax consequences of taking a distribution from my 401(k)?

The consequences of taking a distribution from your 401(k) can vary depending upon your age. The general rule is if you are over the age of 59½, you can take a distribution which is taxed as ordinary income. If you are under the age of 59½, the distribution will be taxed as ordinary income, and you are subject to a 10% penalty. There are several exceptions to this general rule. Therefore, we recommend you contact your accountant or pension plan administrator before taking a distribution.