Should You Incorporate As A Trader?
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One of the most common questions traders ask me is: Then there are the follow up questions about which entity is the best one: What state should it be in? Delaware or maybe Nevada? Should I include my spouse as an owner? Do I need to pay myself a salary? Here are some answers to these common questions. Obviously, you can conduct your trading business as a sole proprietorship.
However, there are many disadvantages to this strategy. Your trader status could hinge upon your ability to prove to the IRS that your trading enterprise is can options be day trader incorporate legitimate business. A more cautious option is to conduct your trading through a more formal legal entity. What makes a sole proprietorship so risky for traders is that neither Congress nor the IRS can options be day trader incorporate clearly defined what constitutes a trader, and the guidelines continue to evolve through tax court case law.
As a result, the trader status you enjoyed last year may not protect you and your business this year. The guidelines are largely based on cases involving individual taxpayers sole proprietorswhich the IRS typically views with far more suspicion than more formal business entities.
Sole proprietors are also more exposed to personal financial risk than legal entities. Because your personal and business assets are not separated, a business misstep could cost you your house, your vehicle and other personal assets.
Another disadvantage sole proprietors have is that trading income is not considered self-employment income, thus you are not allowed to make tax-advantaged retirement contributions.
Tax deductions are extremely limited for sole proprietors as well. Sole proprietors who do not select mark-to-market accounting are put in an odd position of reporting income on Schedule D as capital gain, but expenses on Schedule C as ordinary income, a discrepancy that can draw unwanted attention from the IRS.
The schedule C will constantly show losses as no income is reported on it, only expenses. This will make the IRS think that you are conducting a losing business and after so many years, they will probably want to review your return more closely. It should be clear that you want to avoid an IRS audit, because it is time-consuming, stressful, can options be day trader incorporate costly. A good reason for forming a trader entity is that it allows you to establish a retirement plan or other tax deductible and tax-deferred employee benefit plans.
Furthermore, an entity can deliver business tax breaks to your spouse or other family members. If you missed the April 15 deadline to file for the mark-to-market accounting method, you can form an entity to elect mark-to-market for the rest of the tax year. Entities are also useful for part time traders who just barely qualify for trader tax status and can options be day trader incorporate to use an entity to reduce their chance of IRS questions.
Keep in mind that you will still have to qualify as a trader and achieve certain levels of business activity. The primary legal entity structures are: Entities must be registered within the state where business is conducted. If you pay payroll to fund retirement accounts or medical insurance, your entity must be registered in your home state; in rare cases, however, some traders may wish to register can options be day trader incorporate entity in a state that does not tax entity income.
When it comes to entities for can options be day trader incorporate, the correct and best way is also the simple and easy way. We actually advocate a pass-through entity in your home state. For the appropriate selection for you, we recommend you attend a personal consultation with one of our professional consultants as there is no one legal entity or structure that is right for everyone. The main reason to form a legal entity is to stabilize your business activities and expense deductions.
Without a business entity, your trader tax status could turn on the ruling of the next tax court judge. The tax status of legal entities, however, is well-defined by the IRS. No more worrying about whether you are suddenly going to face a different and unfavorable tax status. In conclusion, it seems that there are many rewards and reassurance of trading through a business entity. Entity benefits outweigh the risks and uncertainty of a sole proprietorship.
Be sure to visit our OTA Tax Pros website to find out how you can attend a free tax planning webinar. Back to the Future Redo? What Did I Miss? Did I Do Something Wrong? Disclaimer This newsletter is written for educational purposes only. By no means do any of its contents recommend, advocate or urge the buying, selling or holding of any financial instrument whatsoever. Trading and Investing involves high levels of risk. The author expresses personal opinions and will not assume any responsibility whatsoever for the actions of the reader.
The author can options be day trader incorporate or may not have positions in Financial Instruments discussed in this newsletter. Future results can be dramatically different from the opinions expressed herein. Past performance does not guarantee future results. Reprints allowed for private reading only, for all else, please obtain permission.