Free Tax Question Help, Answers, and Advice on Tax Preparation, Business Structuring from Experts in the Industry

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.

What are my management fees and how do I pay them?

You have a management corporation, whose sole business is managing the LLC. The LLC pays the corporation two types of management fees on a quarterly or annual basis. The first part of these fees is for any administrative duties the corporation performs for the LLC. This fee is a set rate per month regardless of the LLC's profits.

The second part of the management fees is for trading done by the corporation for the LLC in the LLC's brokerage account(s). This fee is a percentage of the trading gain in the LLC's brokerage accounts. If there is no income from the trading account then this fee will not be paid.

These fees are paid directly from the LLC to the corporation and because they are expenses to the LLC you do not take any money out for the other members of the LLC. You have setup the amounts for both parts of the management fees in your coaching calls and the details can be found in your LLC's binder on the appointment of manager and management agreement.

What is the accounts payable line on my balance sheet and what does it mean?

The accounts payable line on your balance sheet represents money owed to you from the entity(s). Accounts payable is any expenses paid by you, out of your personal account for the entity. Your entity expenses the amount on the date you paid for the cost personally and then has eleven months to reimburse you. You can take all or part of the accounts payable amount out of your entity at any time within these eleven months. Also if you are not reimbursed within the eleven months, the accounts payable turns into a long term liability and the entity will owe you interest on the amount owed.

How do I take distributions out of my LLC?

Anytime you distribute money out of your LLC, that is not a reimbursement or a payment of management fees all of the members must take a distribution at one time. Each member must receive a separate distribution based on their member percentages, and distributions are generally not considered income on their personal tax returns. For example, let's say there are two members in the LLC and member A owns 25% and member B owns 75%, and a total of $1,000 is taken out of the LLC. Partner A will receive a check for $250 and partner B will receive a check for $750.

How long should I keep my business records?

You must keep your records as long as they may be needed for the administration of any provision of the Internal Revenue Code. Generally, this means you must keep records that support an item of income or deduction on a return until the period of limitation for the return(s) runs out. The period of limitation is the period of time in which you can amend your return to claim a credit or refund, or the IRS can assess additional tax. Unless otherwise stated, the years refer to the period after the return was filed. Returns filed before the due date are treated as filed on the due date. Keep copies of your filed tax returns. They help in preparing future tax returns and making computations if you file an amended return.

What is the accrual method of accounting?

Under an accrual method, you generally report income the tax year you earn it, even though you may receive payment in a later year. You deduct or capitalize expenses in the tax year you incur them, whether or not you pay them that year.

What is the cash method of accounting?

Under the cash method, you report income the tax year you receive it. You usually deduct or capitalize expenses in the tax year you pay them.

How to read a Balance Sheet

Assets
Assets are typically broken down into two types. The first type, current assets, is the firm's assets that are most liquid. An asset is liquid if it can quickly be turned into cash with little loss of value. Other current assets include accounts receivable, inventory, and those assets that are considered cash equivalents such as shares of stock in another company. An asset is generally considered current if it is expected to be turned into cash within one year from the date of acquisition.

The second type, fixed assets, is the firm's assets that are least liquid. In the market, they cannot be quickly turned into cash without a significant loss of value. An asset is generally considered fixed if it is expected, at the time of acquisition, that it will not be turned into cash within one year. In fact, many fixed assets, such as buildings and land, are expected to stay on the company's books for the life of the company.

Liabilities
Like assets, liabilities are broken down into two types. The first type, current liabilities, is the firm's liabilities that are expected to mature within one year. However, unlike assets, the maturity of a liability represents an outflow of cash rather than an inflow. Current liabilities include accounts payable, notes payable, and accrued expenses which are liabilities for which a good or service has been received but not yet paid for. The second type, long-term liability, is the firm's liabilities that have a maturity of more than one year. Long-term liabilities often represent a major source of capital and funding for normal operations of a corporation.

Owners' Equity
Owner's Equity (sometimes called shareholders' equity) is the total value of the company's stockholders and represents the second major source of capital for operations. This part of the balance sheet is comprised of the value of preferred stock, common stock, and retained earnings from operations. Owners' equity is whatever is left over after the value of liabilities has been subtracted from the value of assets.

I live outside the United States; do you have an international representative to help me?

Our expertise is with US tax law. We are not knowledgeable with the tax laws in other countries.

Will the Medical Reimbursement Plan work with an LLC?

No, it only works well with a C-Corporation and requires the proper documentation in the corporate records.

I trade FOREX, do I need to worry about wash sales?

Generally, wash sales do not apply to FOREX transactions.

Should I elect Mark to Market?

Mark to Market is an accounting election that will benefit certain traders; however, it is not beneficial for all traders to elect. You should work with your accountant to ascertain whether it will be tax efficient for you.

I read somewhere that you should trade in a single member LLC, but I see that you advise against it. Who do I believe?

If you do business in a Single Member Limited Liability Companies (SMLLC) the business becomes a disregarded entity in the eyes of the IRS. When that happens you are trading as a 'trader in securities', as far as the IRS is concerned. In order to qualify as a 'trader in securities' you must meet the requirements of IRS Publication 550.

Contrary to this, when you set up an entity to trade in you are setting up a business. When the IRS treats you as a business, there are many practical tax strategies and benefits that provide you with more cash flow to trade with.

Should I be trading in a C-Corporation? How can I get started?

To get started we recommend that you fill out the confidential questionnaire, so we can make a correct recommendation. When you send in your questionnaire we will schedule you a complimentary 30 minute consultation and tailor a plan to you and your trading style. We will also send you a booklet on the different types of entities, so you will understand why our recommendations make sense for you.

I set up an entity three years ago, and have used it to trade. However, I have not kept up with the other corporate compliance and documentation. Is it important that I go back now and get that done?

If you are ever audited or sued, and your documentation is not up to date or missing, the IRS can disregard your entity. This could cause some hardships for you and your family. If you need help in getting the documentation done, call us we can give you a hand.

I've heard that I could take a loan out from my self directed 401K and do anything I want with the money. I could use some more money to help me through the trading learning curve. Is this correct and how is it done?

Call one of our agents; they will explain it to you. A 401K is a terrific thing to have in your trading business. You can borrow money from, or contribute money to, the 401k ; contributions to your 401k can be a tax reduction strategy.

What is a living trust?

Test A trust is an arrangement under which one person (a trustee) holds legal title to property for another person (a beneficiary). You can be the trustee of your own living trust, keeping full control over all property held in trust.

A living trust is simply a trust you create while you're alive, rather than one that is created at your death.

Different kinds of living trusts can help you avoid probate, reduce estate taxes, or set up long-term property management. For more details, see Trust or call Traders Accounting at 800-938-9513.

What are advantages of a living trust?

The main advantage of a living trust is the property left through the trust does not have to go through probate court. The probate process is a minimum of 6 months before the inheritors would see any inheritance - and can easily last up to 2 years. In many cases, about 5%-10% of the estate value will be eaten up by lawyer and court fees.

How does a living trust avoid probate?

The property is transferred into a living trust before your death, thus there is no need to go through probate. The successor trustee (generally a spouse or other person appointed to handle the trust after your death) simply transfers ownership to the beneficiaries you have named in the trust. In many cases, the process takes only a few weeks, and there are no lawyer or court fees to pay, easing the burden on loved ones during a stressful time. When all of the property has been transferred to the beneficiaries, the living trust ceases to exist.

Is it a hassle to hold property in a living trust?

Setting up a living trust for you does require some crucial paperwork. For example, if you want to leave your house through the trust, you must sign a new deed, showing that you now own the house as trustee of your living trust. Our experts will walk you through the entire process, making sure all of your I's are dotted and T crossed. There is no need to feel overwhelmed by tedious paperwork, remember our motto, 'You trade, we'll do the rest'!

Is a living trust document ever made public, like a will?

No. A will becomes a matter of public record when it is submitted to a probate court. The terms of a living trust, however, need not be made public. All of your assets and private affaires can stay just that. Private.

Does a living trust protect property from creditors?

No. A creditor who wins a lawsuit against you can go after the trust property just as if you still owned it in your own name. Generally, after your death, all property you owned -- including assets held in a living trust -- is subject to any lawful debts.

On the other hand, probate can also offer a kind of protection from creditors. During probate, known creditors must be notified of the death and given a chance to file claims. If they miss the deadline to file, they're out of luck forever.

Can a living trust reduce estate taxes?

A living trust can reduce the federal estate tax bill for people who own a lot of valuable assets.