EDUCATION CENTER
GTT RESOURCES: TRADER TYPES: ENTITIES
Although not every trader needs to form an entity, they are necessary
if you want to contribute to a retirement plan or elect MTM after
missing the individual election deadline of April 15.
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Our alliance partner for entity formations.
GTT Trader Tax Strategies for trader/managers of
hedge funds and other types of “trading” partnerships:
Active traders/managers in hedge funds and other types of “trading” companies
should learn how they can use “trader
tax status” and the “trading rule” (a tax loophole) to
deliver business tax breaks to their investors (including mark-to-market
accounting, which acts as tax loss insurance). On our GTT
Tax Strategies page, we explain our tax strategies using the "trading
rule" loophole. GTT is the leading firm for showing business traders around
the country how to use "trader tax status" for their own accounts.
Now, we are showing traders how to set up hedge funds with trader tax status
and take advantage of the "trading rule" loophole.
Here’s a 2003 tax savings
idea!
Put $5,000 in your pocket simply by saving $13,788 for your retirement.
Hire our firm to quickly form a "GTT Mini 401(k) Retirement
Plan"
and a "GTT single-member LLC" (traders need an entity for
a retirement plan). Before year-end, your LLC pays a fee of $15,000
to you, the manager. You then contribute $13,788 to your mini 401k
plan by October 15, 2004 ($100 by year-end). Click
here to learn more.
Another Hot idea!
Husband & wife trading partnerships: If your spouse is an integral
part of your trading business, the IRS requires you to file a Form
1065 (US partnership income tax return), rather then an individual
tax return Schedule C (Profit or Loss from Business). This doesn't
hurt you and instead it can really save your hide if you missed
the mark-to-market election. Click here
to learn more.
For general information, click here.
If you have any questions about entities, send us a confidential e-mail at entities@greencompany.com or call us.
If you trade securities and/or commodities as a business activity, you are entitled to many tax breaks. Business traders receive preferential “business tax” treatment versus “investor tax” treatment (see details below).
A trader doesn’t have to form a separate legal entity, like
a partnership, corporation or limited liability company to receive
“business tax” breaks. If your trading activity rises to
the level of business status, you are entitled to business tax breaks
as a “sole proprietor” or “unincorporated entity.”
Conversely, forming a separate legal entity to conduct your trading
activity, without rising to the level of trading as a business, will
not entitle you to “business tax” breaks. In that case,
you have an “investment entity” and must use “investment
tax” rules (few breaks and many tax costs).
To receive business tax breaks in a separate legal entity, read
our "GTT Tax Strategies" page. Click
here.
Our articles on entities: Our Robert A. Green, CPA, is the leading
expert on the subject of entities used in trading businesses. Below
is the list of articles on entities he has written for Active
Trader magazine:
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November 2002: "Simple is Better."
An article on entities for traders including single member LLCs, husband
& wife general partnerships and what to watch out for in trader
entity tax avoidance schemes.
March 2002: "Don't miss out on trader tax breaks:” Business tax returns for traders come in many varieties. One size doesn't fit all, so it's important to know which one is right for you and your business.
January 2002: "More is not better:” For certain high net-worth traders, using multiple entities for a trading business — including corporations, family partnerships and trusts — may be tax beneficial. However, for most traders these approaches can lead to trouble. Learn how to stay clear of tax-avoidance schemes and how to fix problems when you find yourself in the middle of them.
December 2001: "A Solution to a taxing problem:” Trading in a C-Corp or LLC taxed as a C-Corp may lead to tax problems such as double taxation or no tax benefits from losses. If you're in this situation, here's a clever fix: Use the same types of agreements that proprietary trading firms do with their traders.
August 2001: "Blue plate specials:” No (tax)-free lunch. Is it a good idea to set up your trading business in an income tax-free state? Some traders may think so, but we look at the realities of this arrangement.
June 2001: "Streamline your trading business:” Keep your trading business simple. When evaluating business and tax structures for trading in an entity, traders need to consider substance over form. An unincorporated trading business is the best choice for most traders.
An unincorporated trader needs an entity only if he or she wants to have a retirement plan and/or deduct health insurance premiums. Every profitable trader should have a retirement plan. Trading income is not "earned income," and thus is not able to be put into a retirement plan. So, you need an entity to pay you a salary, and the salary will be considered earned income. You then can set up a retirement plan and make annual tax-deductible contributions. The IRS recently increased the maximum annual amounts taxpayers are allowed to contribute, and this is a great tax savings area for traders. See our retirement plan page for more details.
Health insurance premiums: Self-employed taxpayers with "earned income" can deduct 70 percent of their health insurance costs in 2002, increasing to 100 percent in 2003 and beyond. This deduction is from "adjusted gross income" (AGI), which is a dollar-for-dollar deduction – just like ordinary business expenses are from gross income.
When it comes to entities for traders, the correct and best way happens to be the simple and easy way. We usually advocate a "pass-through" entity in your home state. Pass-through entities mean that your entity does not pay a tax; instead, gains, losses or expenses on the entity are passed through to your individual tax return to be taxed there. Pass-through entities file their own tax return and allocate income, gain, loss and expense to partners on a Form K-1. You can read more about pass-through entities here.
In many cases, the best approach is a "single-member LLC." With this, you do not file a partnership tax return. Instead, you report all the entity level income, gain, loss and expense on your individual return directly. This is by far the simplest approach, and it is the same as being a sole proprietor – except that with the LLC you may have a retirement plan.
We have a huge problem with most entity structures marketed to traders. They simply don't work as intended in avoiding taxes on gains, and in the event you lose money (which will occur more than 50 percent of the time), you severely hurt yourself. Contact us and we will tell you what is severely wrong tax-wise with these schemes. Don't be foolish – check with us first. Save yourself the $3,000 these firms will charge you upfront, and sign up for our one-hour consultation, which costs only $225. We can probably achieve all your goals in a much less complex structure and at a cost of less than $1,000. Our entity formation retainer is $400, and you pay the online incorporator around $250 (it varies by state), which includes the state filing fees.
We handle everything you need – consultation, formation, LLC Operating Agreements, start-up tax matters and your annual tax preparation. We stand by our work from beginning to end. The other firms charge you $3,000 for an ill conceived multiple entity and, after they take your money, they don't answer your phone calls or do tax preparation – mainly because tax preparation doesn't work.
We can advise you on entities for money management, hedge funds and other investment vehicles. Click here to learn more about our hedge fund services.We can also show you ways to trade your family’s accounts without making things too complicated. We hope to hear from you soon.
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After you purchase your consultation, please e-mail info@greencompany.com.
Tell us the facts and circumstances surrounding your trading account,
and what you hope to accomplish by forming an entity. We will then
e-mail you reading materials on GTT Entities. After you read this
material, we will schedule the phone consultation. This insures that
your hour will be well utilized. We don't waste time, and you will
find great value for this fee. If you are in a rush, that is no problem.
Sign up and we can start that same day, usually within an hour of
sign up.
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Our GTT Entity Formation Retainer includes everything you need. First, we will consult with you to plan the best type of entity in the best state. We then run pro-forma tax returns to make sure there are no hidden "stealth taxes" (state minimum taxes or filing fees) or other surprises. We then form your entity online using BFi, a leading online incorporation service (their banner ad is shown below). For individual state pricing (many are less than $300), click the link below and then "What Does It Cost." You can assume the entire entity formation cost will be less than $750, which includes our $400 retainer/fee, and the formation and filing of the entity. There is simply no better or cheaper way to set up an entity than with GTT. Obviously, we are very competitive, but you can't find our expertise anywhere else, and without our help you can fall into very costly pitfalls. We will deliver the entity you need to save taxes in the best legal manner.
Our $400 retainer fee includes the below services and login access:
1.78
hours of Robert A. Green CPA's time ($225 per hour) which is budgeted
to accomplish the below start up services:
45 minutes:
entity tax structure planning and consultation, to get the right
entity for you. We prepare example tax returns for your tax situation;
15 minutes:
online formation of entity;
15 minutes:
SS-4 tax ID number;
15 minutes
for S-Corp election; or..15-30 minutes for LLC Operating Agreement;
15 minutes
for resolutions to open trading account, mark-to-market elections
and other related resolutions.
GTT Entity Formation Login Area. When you sign up for our GTT Entity Formation & Consultation Services, we give you login access. Click here to take a look at our entity formation login area and our sub area for LLCs.
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Please visit our preparation area to learn more about our credentials, reasons to hire us, virtual process, testimonials and much more.
We can form a "single-member" LLC for you. This can be
done quickly, and it will provide you with mark-to-market accounting
and the opportunity to create "earned income," which is
required for retirement-plan contributions and health-insurance premium
tax deductions (from adjusted gross income). An "unincorporated"
trader does not have "earned income," and therefore cannot
receive any of these tax benefits.
If you missed
the mark-to-market accounting election, you can still achieve
MTM status for the balance of the trading year, but not for the
year to
date. With a new entity, you can elect Mark-to-Market
Accounting status "internally" (no IRS filing is required)
within 75 days of inception. This will provide you with "tax
loss insurance” for the balance of the 2003 calendar year.
If you want to deduct retirement-plan contributions and/or health-insurance
premiums, you need an entity to create "earned income."
The simplest, most inexpensive way to do this, without causing any
other tax problems, is by forming a "single member" LLC.
A single-member LLC is a pass-through entity. However, since there
is only one member (you), a partnership tax return may not be filed
(as would be the case if there were two or more partners). That's
good news, since you don't have to spend extra time and money filing
a separate tax return for the entity.
A single-member LLC tax return is basically the same as a sole proprietor
(unincorporated) trader's tax return.
In both cases, all trading expenses are reported on Schedule C (Profit
or Loss from Business), MTM trading gains and losses are reported
on Form 4797 (Sale of Business Property – Part II Ordinary Gain
or Loss), and interest and dividend income are reported on Schedule
B (Interest and Dividends).
The differences with the single-member LLC are that the LLC tax identification
number (EIN) – as opposed to the sole proprietor’s social
security number – is reported on the Schedule C, and the LLC
is entitled to pay the owner a salary to create earned income.
The key tax difference (and source of tax benefits) is that a single
member LLC may have a second Schedule C, filed by the "manager"
of the LLC trading business. The second Schedule C reports a fee from
the LLC trading business, which is the filer of the first Schedule
C. This is a "wash," and there is no difference in overall
income – the first Schedule C deducts an amount equal to what
the second Schedule C reports as income.
The key reason to do this is to create "earned income."
That second Schedule C (filed by the “manager”) has "earned
income," which is subject to self-employment taxes. The first
Schedule C (filed by the trader) does not. A trader needs "earned
income" to deduct retirement-plan contributions and health-insurance
premiums.
For information on retirement plans, see our Retirement Plans for
Traders page. Click here.
Health insurance premiums: Self-employed taxpayers with "earned
income" can deduct 70 percent of their health-insurance costs
in 2002. This total will increase to 100 percent in 2003 and beyond.
This deduction is a dollar-for-dollar deduction from "adjusted
gross income" (AGI), just as an ordinary business expense would
be.
In most cases, we need only a short period of time to work with a
trader and determine a good solution for achieving MTM status. This
is done through the use of a "single-member LLC" entity
(or other pass-through entity such as an S-Corp) in the trader's home
state.
Cost: The cost is usually less than $750,
including state filing fees, entity formation costs and our fee.
In
many cases, no or very nominal state taxes apply.
Speedy process: The process takes 3 days,
and you can be up and running with a new trading entity with MTM
status
for the balance of your trading activity in 2003.
Summary: There are two tax benefits traders
gain by forming a single-member LLC. The first is being able to
achieve
MTM status for the remainder of 2003, if you missed the election
deadline of April 15, 2003. The second is having the opportunity
to create
earned income, which is required for retirement-plan strategies and
deducting health-insurance premiums. This can be done with our help,
which you need to avoid several tax pitfalls.
Another Hot idea!
Husband & wife trading partnerships:
Husband and wife trading teams are automatically considered a “general partnership.”
Many traders list their spouses name on their trading business brokerage accounts for various reasons including: “joint tenancy”, in case one spouse dies; the money belongs to both spouses; or because both spouses are in the trading business. Joint tenancy is not a problem, but you may have tax complications in the other two cases.
If your spouse is part of your trading business (a co trader or manager), the IRS does not allow a joint Schedule C filing and requires you to report the trading business activity on a partnership tax return (Form 1065).
Don’t be alarmed by this IRS tax rule, clearly stated in the Schedule C instructions, it can be beneficial in some instances. The IRS does not require a formal partnership agreement or any filing whatsoever, except the partnership tax return. This is a “general partnership” for legal purposes and not a limited partnership or other type of partnership, which may require formal agreements.
Most states follow the federal rules and they also don’t have “minimum” taxes for general partnerships. Check with your home state, their Web site or in our Entity Formation Login area. We have all the state rules and a nifty state table.
In this case, a husband and wife trading partnership, the entire partnership activity ends up on the “married filing joint” tax return. The only difference is that instead of having a Schedule C for the trading expenses and a Form 4797 for mark-to-market trading gains and losses, the entire trading loss (expenses and trading losses) is reported on Schedule E, page 2, Part II (Income or Loss from Partnerships and S-Corporations), Non-Passive Income and Loss section.
“New taxpayer” trading entities (never filed a tax return before), may elect mark-to-market (MTM) accounting by filing an “internal” resolution within 75-days of inception. If a spouse joins your trading business, you implicitly formed a partnership on the date he or she joined your business, and you have 75-days from that partnership inception date to elect MTM internally.
This can be beneficial to traders who missed the April 15 MTM election deadline. Their spouse can join their trading business and they can then elect MTM for this partnership after the April 15 date. Be careful with this tax-beneficial strategy. If your spouse was part of your trading business from January 1st on, then you had to elect MTM by March 15.
In the case your spouse joins mid year, split your trading business activity between the Schedule C for the pre-partnership period and the partnership return afterwards. Use the cash method of accounting related to the Schedule C period and the MTM method for the partnership return.
If your spouse is not part of your trading business, and you merely listed him or her on your trading brokerage statements (and Form 1099s) for joint tenancy reasons that should not affect your “sole proprietor” trading business reporting on Schedule C.
Watch out, there can be complications. Assume you lose your spouse’s
share of the trading account assets and your spouse is not part of
your trading business. If you are using mark-to-market accounting,
you may not use ordinary loss treatment for your spouse’s money
lost. First of all, you don’t have basis and second, your spouse
may not use MTM accounting. Rather, your spouse should take a “capital
loss” for his or her share of the loss. You should consult with
an expert on trader tax entities for more help in this situation.
If your spouse is not in your trading business, also be careful not
to list his or her name, as the only name on your trading brokerage
accounts. The IRS may prevent you from using trader tax status and
MTM because the money belongs to your spouse. You should consult with
a trader tax expert in this instance. Our firm has some clever solutions
and fixes. One involves using a note payable.
This husband & wife strategy is complex and if any of the tax returns are prepared incorrectly and don't have the correct footnotes, you can mess it up and kill the tax benefits. We highly recommend that you engage us for a one hour consultation below and have us review your facts and circumstances and then recommend the best way to proceed. We will recommend that you engage our firm to prepare your partnership and individual tax returns. It will be well worth our reasonable fees