EDUCATION CENTER
Trading Business Expenses

Business traders can deduct all reasonable business expenses, whether they have trading gains or losses, saving around $8,000 per year on average. Investors, on the other hand, are very limited. The business-expense deductions hinge on qualifying for trader tax status, of course.

The good news is you can still claim trader tax status for 2011, and even other open tax years (usually up to three years prior). Unlike Section 475 MTM (mark-to-market) accounting, which must be elected by the April 15 deadline, trader tax status can simply be claimed by a taxpayer after the fact, based on facts and circumstances. If you’re first learning about trader tax status, you might still be in luck for tax-year 2011.

INVESTORS VS. BUSINESS TRADERS
Unlike business traders, investors are stuck with restricted itemized deductions. Investors can’t deduct pre-business education including most seminars and travel costs, home-office expenses, start-up costs, and many other types of trader expenses.

Investment expenses are only allowed as part of “miscellaneous itemized deductions” in excess of 2 percent of adjusted gross income (AGI), and they aren’t deducted against the alternative minimum tax (AMT).

BUSINESS EXPENSES
Business deductions include:
• Section 179 (100 percent) and/or regular depreciation on computers, equipment, furniture, and fixtures.
• Amortization on start-up costs (Section 195), organization costs, and software.
• Post-business education
• Internet and cable, books and publications, market data, online and professional services, chat rooms, mentors, coaches, gifts, supplies, telephone, travel and entertainment, seminars, conferences, assistants, consultants, and more.
• Home-office expenses.

Business deductions don’t include:
• Cars. Vehicles aren’t usually deductible for at-home traders, because traders don’t need a car to visit clients or companies.
• Commissions. These are part of trading gains and losses; they aren’t a business expense. If you exceed the net capital loss limitation of $3,000 per year, commissions are deferred as part of your capital-loss carryover.

This is an excerpt from Green’s 2012 Trader Tax Guide • Copyright © 2012