Many Ways Traders Can Save Taxes Before Year-End

December 2, 2016 | By: Robert A. Green, CPA

ForbesSmallDon’t wait until 2017 for likely Trump tax cuts to lower your taxes; act before year-end for quicker tax breaks.

In this blog post, learn how to defer income, deal with wash sale losses, make a valuable Section 475 election, maximize trader tax status, accelerate itemized deductions, reduce under-estimated tax penalties, and make smart moves with your retirement plans.

Tax deferral for 2016
If there’s going to be tax reform in 2017, it’s safe to assume it will include a meaningful reduction in tax rates for all tax brackets. It’s probably wise to defer income and accelerate deductions at the end of 2016.

Trump and Congress may significantly reduce tax rates 
The 2016 top individual tax rate is 44%, but it may be reduced to 33% for 2017 by Trump and House tax cut plans, delivering a significant 11% reduction. The top official rate for 2016 is 39.6%, plus there’s an additional 3.8% Obamacare Net Investment Income Tax (NIIT), and itemized deduction phase-out (Pease), which effectively means the rate is 44% rate for taxpayers with investment income — which includes traders. (Trump’s Treasury Secretary pick Steven Mnuchin was quoted in USA Today on Dec. 1 saying “Any tax cuts that we have for the upper class will be offset by less deductions to pay for it.”)

Try to delay business, investment income, and other types of revenue until 2017. For example, why pay Obamacare net investment taxes in 2016 if you can defer investment income to 2017 when Republicans promised to repeal Obamacare taxes? (Learn more about Obamacare taxes.)

Be cognizant of “constructive receipt of income” rules, whereby it’s not possible to defer income and pass IRS muster. (Read Some Proprietary Traders Under-Report Income.)

Consider “tax loss selling” of investments and trading positions. That’s where you let profits run on open securities positions and sell losing positions to realize tax losses before year-end. Be careful not to trigger a wash sale loss by buying back a substantially identical position 30 days before or after incurring the loss. A wash sale loss with a taxable account at year-end postpones the loss to 2017, which would ruin your plan to accelerate losses with tax loss selling.

Avoid wash sale losses in 2016
Avoid getting stuck with a wash sale loss at year-end in taxable accounts, and avoid them throughout the year with IRAs. If you have a large capital loss carryover, then wash sales with taxable accounts may not change your $3,000 capital loss limitation — but you must account for wash sales. Wash sales are a primary concern for securities traders using the default realization (cash) method, but not Section 1256 contract and forex traders as those instruments are exempt.

A concern for tax preparers is that the IRS requires brokers to prepare 1099-B wash sale loss adjustments based on identical positions, per that one account. The IRS asks taxpayers to go a step further: To calculate wash sales on Form 8949 based on substantially identical positions, across all accounts, including IRAs. Example: A broker 1099-B does not calculate a wash sale on Apple equity vs. Apple options because they are not identical positions (symbols), but the IRS asks taxpayers to do so because they are substantially identical positions. (Including options at different expiration dates.)

Consider a “Do Not Trade List” to avoid permanent wash sale losses between taxable and IRA accounts. For example, trade tech stocks in your individual taxable accounts and energy stocks in your IRA accounts. Otherwise, you can never report a wash sale loss with an IRA, as there is no way to record the loss in the IRA.

Break the chain on wash sale losses at year-end in taxable accounts to avoid wash sale loss deferral to 2017. If you sell Apple equity on Dec. 20, 2016 at a loss, don’t repurchase Apple equity or Apple equity options until Jan. 21, 2017, avoiding the 30-day window for triggering a wash sale loss. Wash sale loss adjustments during the year in taxable accounts can be realized if you sell/buy those open positions before year-end and don’t buy/sell them back in 30 days.

Many tax preparers, including CPAs, import or attach broker 1099-Bs to generate tax return Form 8949 (Sales and Other Dispositions of Capital Assets); they don’t account for wash sales based on IRS rules for taxpayers. It’s become a widespread industry practice, and I have not heard about the IRS challenging it to date. If you plan to use this industry practice (at your risk), it’s wise to avoid wash sale loss conditions in the first place, so there are few gaps in broker vs. taxpayer rules. The crucial period is Dec. 1 through Jan. 31, covering the 30-day window on each side of year-end for triggering wash sales among taxable accounts. (That includes both spouses’ accounts on a married filing joint tax return.)

If you know you have wash sale loss conditions that the broker will not account for on 1099-Bs, then you should consider trade accounting software that’s compliant with wash sale rules for taxpayers. Download the original trade history from your broker’s website into a compliant program to generate Form 8949 or Form 4797 with Section 475.

Section 475 Election & Section 481(a) adjustment
We have always recommended that our trader tax status (TTS) clients elect Section 475 MTM on securities for ordinary gain or loss treatment, which exempts Section 475 trades from wash sale losses and capital loss limitations. (There is one exception: If the trader has a large capital loss carryover, they prefer to retain capital gains treatment until they use up their capital loss carryover, as Section 475 is ordinary income.)

It’s too late to elect Section 475 in 2016 for existing TTS individuals and entities; the election deadline was April 18, 2016 for individuals and partnerships and March 15 for S-Corps. Without Section 475, traders are stuck with a capital loss limitation and subject to wash sale loss rules. (A “new taxpayer” entity may elect Section 475 internally within 75 days of inception.)

Consider filing a 2017 Section 475 election statement with the IRS by April 15, 2017, for individuals and March 15, 2017, for existing S-Corps and partnerships.

Under current law, a 2017 Section 475 election takes effect on Jan. 1, 2017. Unrealized gains and losses on open TTS securities positions at year-end 2016 are captured in Section 481(a) adjustments made on Jan. 1, 2017. The Section 481(a) adjustment is ordinary gain or loss.

An ongoing IRS Clean Up Project for Section 475 might change some of these rules in 2017, which would be worse than the current law. The IRS hinted it may require a Section 481(a) adjustment to be capital gain or loss treatment, rather than ordinary income or loss. The IRS may also institute a “mark and freeze” election so the effective date would be the election day, not Jan. 1.

Tax reform may repeal the two-year NOL carryback rule, only retaining NOL carryforwards. Since 1997, Section 475 MTM traders benefited from NOL carrybacks; they received quick refunds replenishing their trading capital.

Trader tax status offers business tax breaks
If you qualify for TTS (business expense treatment — no election needed) in 2016, accelerate trading expenses into that qualification period as a sole proprietor or entity. Consider purchasing new equipment and other expenses before year-end 2016. Under the cash accounting method, a current year deduction is allowed for an item purchased by credit card or check by Dec. 31, even if you don’t take delivery until after Dec. 31.

If you strongly expect to qualify for TTS in 2017, but not 2016, consider deferring trading expenses until 2017. I don’t expect that tax reform will undermine TTS business expense treatment. Investment expenses are limited under current tax law and the House plan eliminates miscellaneous itemized deductions including investment expenses in 2017. Accelerate investment expenses into 2016 if you exceed the 2% AGI threshold for this deduction and don’t trigger AMT.

Itemized deductions will likely change with tax reform
To help pay and offset a reduction in tax rates, Trump, and Congressional tax plans reduce tax loopholes, including itemized deductions.

Before finalizing your 2016 tax plans, look at the Trump tax plan and House tax reform framework. If you stand to lose some itemized deductions in 2017, consider accelerating those deductions into 2016, where you may benefit more.

For example, the House framework states “All itemized deductions would be eliminated except for the mortgage interest and charitable giving deductions.” State taxes included in itemized deductions, including income, real estate, and property taxes would be repealed under the House plan. The Trump plan allows existing itemized deductions, but limits itemized deductions overall to “$200,000 for Married-Joint filers or $100,000 for Single filers.” Both plans raise the standard deduction to compensate for these changes.

Clients may prefer to prepay all types of state taxes and other itemized deductions in 2016 to ensure deductibility. Keep an eye out for alternative minimum tax (AMT) in 2016 which does not allow some itemized deductions including state taxes and investment expenses. Both Trump and House plans repeal AMT for 2017.

Estimated income taxes for 2016
Many traders underpaid their 2016 estimated income taxes since they feared losses later in the year and/or wanted to reinvest their capital. Many view under-estimated tax penalties as a form of margin interest. They should consider making a timely Q4 estimated tax payment by Jan. 15, 2017 to limit under-estimated tax payment penalties. Consider prepaying the state income tax voucher by Dec. 31, 2016, if it lowers your federal tax bill and does not trigger AMT.

Deferring income to 2017 reduces 2017 estimated taxes, too. It reduces the 2016 “safe harbor” threshold.

S-Corp traders can increase tax withholding on year-end compensation to avoid under-estimated tax penalties since the IRS treats tax withholding as being made throughout the year. (Read Still Time For Trading Entities To Make Valuable Year-End Tax Moves.)

Choose traditional over Roth retirement plan for 2016
Maximizing a “traditional” retirement plan tax deduction for 2016 is an excellent way to reduce 2016 taxes while deferring income for many years until retirement when tax rates on retirement distributions may remain lower. Plus, you can trade the retirement plan for tax-deferred growth.

Conversely, with a Roth retirement plan contribution, you don’t get a current year tax deduction, and retirement distributions are tax-free. Consider that tax deductions may be more valuable in 2016 than in 2017, so consider a traditional retirement plan deduction for 2016, rather than a Roth contribution.

Postpone Roth IRA conversions
A Roth IRA conversion has been a wise idea for many years, but it may not be a good idea for 2016 if you expect a reduction in your tax rate for 2017. Consider holding off on doing a Roth conversion until 2017, when the tax bill for taking in conversion income might be at a lower tax rate.

Conversely, if you are in a low tax bracket or have a taxable loss in 2016, consider a Roth conversion before year end 2016. The IRS allows individuals to reverse (“recharacterize”) a Roth conversion in the subsequent tax year, by Oct. 15th if on an extension. If Congress significantly reduces your tax rate for 2017, or for any other reason, you can unwind the 2016 Roth IRA conversion. It’s worth the effort in this case to do it.

There are many other potential tax planning opportunities for savings, and it’s best to work directly with your tax advisor to flush them out. Every client file is different. Get a handle of your trade and other accounting so you can make decisions based on fact rather than projection. Whenever tax rates and law change from year to year, it makes year-end tax planning paramount!

My partner Darren Neuschwander, CPA contributed to this blog post.


Still Time For Trading Entities To Make Valuable Year-End Tax Moves

November 30, 2016 | By: Robert A. Green, CPA

Forbes published this post.

If you conduct a trading business in an S-Corp and plan on employee benefit plan deductions for 2016, you need to execute certain transactions at year-end. If you have a partnership, there are fewer steps to take.

S-Corp year-end planning for traders

Before the end of the year:

  • Execute and pay officer compensation. Determine compensation based on the retirement plan contribution you want. (You should limit retirement plan contributions to net profits, and not fund plans if you have net losses in the S-Corp. You need this officer compensation to create earned income to have employee benefit plan deductions.)
  • Establish a Solo 401(k) or defined benefit plan (DBP) before year-end. Contribute up to $59,000 in a Solo 401(k) and perhaps up to $200,000 or more with a DBP if you are 45 or older.
  • “Use or lose” an S-Corp accountable plan before year end for reimbursing business expenses paid individually, including home office expenses.

In January 2017:

  • Fund the Solo 401(k) “elective deferral” contribution: Up to $18,000, plus an additional $6,000 catch-up provision, if age 50 or older. Deduct the elective deferral from taxable wages on the W-2. The elective deferral is subject to payroll taxes.
  • For an S-Corp: Add officer health insurance premiums to the officer’s W-2 taxable wages. The amount is exempt from payroll taxes, including FICA, Medicare and state workmen’s compensation. The S-Corp owner/officer should simultaneously take an AGI deduction for health insurance on his or her individual tax return. (Officer health insurance is quirky with an S-Corp).
  • Prepare and e-file W-2s by Jan. 31 (new deadline this year).
  • Prepare and e-file Form 1099-Misc for “non-employee compensation” paid to service providers, including independent contractors, by Jan. 31 (new deadline this year).

For payroll, we recommend a team at www.Paychex.com dedicated to the needs of our trader tax clients using S-Corps. Please contact us for their contact and related information.

To avoid under-estimated tax penalties caused by skipping quarterly estimated tax payments earlier in the year on the individual level, consider increasing tax withholding on officer compensation. The IRS treats payroll tax withholding as being made throughout the year, so that should lower under-estimated tax penalties if you generated most of your trading gains earlier in the year.

The S-Corp needs to qualify for trader tax status (TTS) for the IRS to allow it to have compensation and employee benefit plan deductions, including health insurance and retirement plans. The IRS does not permit an investment company to have these employee benefit plan deductions.

The IRS requires partnerships to treat compensation paid to partners as “guaranteed payments,” and it does not allow partners to have salary run through payroll. But, a trading partnership should not use guaranteed payments since the IRS views it as an investment company. A partnership may pay an administration fee to the owner/trader, but with partnership losses caused by these fees flowing through to the partner, it’s difficult for them to generate self-employment income (SEI). A partner needs SEI to have AGI-deductions for health insurance and a retirement plan. S-Corp losses do not flow through to the owner for SEI purposes, and that’s the reason I recommend the S-Corp structure for traders who want employee benefit plan deductions.

If you have a dual entity structure with trading partnership and S-Corp or C-Corp management company, you should be adhering to written agreements providing for administration fees and or profit allocation. The agreements must represent valid business relationships, operations and work performed.

To learn more, watch our complimentary recording: Year-End Planning For Entities: Payroll, Retirement and Health Insurance. The accompanying worksheet (on the recording page) highlights the differences in a Solo 401(k) vs. a defined benefit plan and tax savings at different levels of income. This content is dated Nov. 12, 2015, and it’s still useful for 2016 year-end tax planning as there are few tax changes from 2015. I expect changes in entity tax strategies with tax reform and tax cuts in 2017, so stay tuned for blog post updates. (Read Traders Likely To Benefit If Senate Rams Through Trump Tax Cuts.)

I suggest our entity clients contact their assigned CPA immediately to get started on valuable tax planning, including executing the above transactions on a timely basis. (Read Many Ways Traders Can Save Taxes Before Year-End. Please don’t wait until late December as we take time off for the holidays.

My partners Darren Neuschwander, CPA and Adam Manning, CPA contributed to this blog post.


Traders Likely To Benefit If Senate Rams Through Trump Tax Cuts

November 12, 2016 | By: Robert A. Green, CPA

ForbesSmall

Click to read on Forbes

Tax reform with rate reduction may be a positive change for trading businesses conducted in pass-through entities, which may qualify for a new lower business tax rate vs. ordinary income taxed at higher rates. Before I tackle the details for traders, I discuss the likelihood of Congress passing tax reform in early 2017.

Few pollsters and tax advisers expected a Republican sweep of the election with Donald J. Trump winning the White House and Republicans retaining control of the Senate and House. Most tax advisers expected Hillary R. Clinton to win the presidency, the Senate to flip Democrat, and Republicans to maintain the majority of the House — continuing a divided government and tax-reform gridlock.

With the Republican sweep, some tax advisers and writers are forecasting the Republicans might use the nuclear option (reconciliation) to ram through their agenda, including repeal of Obamacare taxes and passing tax reform with tax cuts. I’m not sure I agree the Senate will use reconciliation for passing fundamental tax reform, yet it’s wise to consider tax planning just in case there is major tax reform in 2017.

Tax deferral at year-end 2016
If there’s going to be tax reform in 2017, it’s safe to assume it will include a reduction in tax rates. It’s probably wise to defer income and accelerate deductions for year-end 2016. Consider “tax loss selling” of investments and try to postpone business and other types of revenue until 2017. Conversely, if you are in a low tax bracket for 2016 and expect to be in a higher bracket in 2017, then do the reverse.

History of reconciliation used for tax cuts and tax hikes
Reconciliation is commonly referred to as the “nuclear option” because it “blows up” bi-partisan consensus in the Senate. Reconciliation is a drastic fast-track procedure that allows a simple majority of 51 to pass bills instead of the usual 60. The “cloture vote” of 60 Senators is needed to break a filibuster, which is the minority’s system of blocking legislation. It’s rare that one party has 60 Senators in their ranks, so a cloture vote encourages bi-partisan consensus.

The Republicans used Senate reconciliation to pass President George W. Bush’s tax cuts in 2001. The procedure requires a 10-year sunset provision. In 2010, President Barack Obama extended the Bush tax cuts for two years due to the recession, which led to the fiscal-cliff deal in 2012.

The Democrats used Senate reconciliation to ram through key tax elements of the Patient Protection and Affordable Care Act (Obamacare) in 2010, which poisoned the well for President Obama with Republicans and contributed to gridlock during the remainder of his two terms.

Will 51 Republican Senators support a reconciliation procedure?
Not all Republican Senators are on good terms with President-elect Trump. I’m not sure Republicans can count on votes from Republican Senators Lindsey Graham, John McCain, Jeff Flake and Ted Cruz in a reconciliation vote for Trump tax cuts, which are more aggressive than the House tax reform framework. Without their votes, the reconciliation measure won’t succeed. The Senate needs all 51 Republican Senators to pass a bill using reconciliation assuming all 48 Democrat senators vote no, which pundits expect. (There is a run-off election in Louisiana for one Senate seat.)

Trump’s tax plan is revenue negative
Tax scoring bodies declared Trump’s tax cut plan “revenue negative,” and they claim it will add significant amounts to the national debt. (Trump argues it should be scored dynamically based on a 4% growth rate.) I wonder if Republican Tea Party Senators (including Senator Ted Cruz) might object to busting the budget with Trump tax cuts, favoring the House tax reform framework instead, which scorers consider as more revenue neutral.

I expect Democrats to fight hard against tax cuts for the wealthy since they campaigned on tax hikes on the rich. Bush-like tax cuts, more extreme in rate reduction, will likely poison the well if passed in a reconciliation procedure with no Democratic support.

The House tax reform framework
In September 2016, Donald Trump revised his tax-cut campaign plan to be more in tune with Speaker of the House Paul Ryan and House Ways and Means Committee Chairman Kevin Brady’s tax reform framework “A Better Way: A Pro-Growth Tax Plan for All Americans.”

The Trump and House tax reform plans are similar in many ways, so it should be easy for Republican leaders to meld them together into one plan. Trump’s tax cut plan is more aggressive than the House by lowering the business tax rate to 15% vs. the House capped rate of 25%. That was par for the course for Trump, one-upping the House and being bolder.

The plans also differ on international tax changes, with Trump being more negative towards global corporations. Trump suggests taxing foreign income and repealing offshore tax deferral. The House is more global-centric, supporting international trade, too.

Small ball: Repatriate foreign earnings for infrastructure spending
There seems to be bi-partisan consensus to repatriate corporate foreign cash hoards at lower tax rates, to use those funds for infrastructure spending in America, with a “buy American” provision. But I’m not sure the Republicans want to play small ball now, with their perceived voter mandate and sweep. They may feel emboldened to ram through tax reform with tax cuts through reconciliation, instead.

Trading businesses may significantly benefit from tax reform
Trump and House tax plans provide meaningful tax-rate reduction for businesses, including those operating in a pass-through entity including an LLC, partnership, and S-Corp.

The Trump tax plan mentions the 15% business tax rate is for “all businesses, both small and large, that want to retain profits within the business.” I need to see further details to resolve open questions. Is the 15% rate for undistributed profit only in a pass-through entity? Schedule C sole proprietor businesses do not currently account for distributions, so will they be treated differently from pass-through entities?

Hopefully, like other businesses operating in a pass-through entity, a trading business will be able to qualify for Trump’s 15% business tax rate or the House’s 25% capped rate.

Both Trump and House plans reduce the top individual tax rate to 33% from 39.6% in 2016, which means the business tax rate will still be substantially lower than the individual rate (15% vs. 33%). This tax cut will incentivize taxpayers to create businesses, and generate business income, which is a good thing for job creation.

In the past, when Congress talked about reducing corporate tax rates, tax advisers cried foul, claiming small businesses don’t use a corporate structure but rather pass-through entities taxed at higher individual tax rates. (Anytime Congress talks about lowering corporate tax rates but not reducing individual rates for small business, it leads to distortion in tax planning. You can’t leave out small business pass-through entities and only do corporate tax reform.)

Both Trump and House plans reduce itemized deductions, repeal the alternative minimum tax and personal exemptions. That affects the effective tax rates.

Trader tax status and pass-through entities
To qualify for a preferential business tax rate, I guess a taxpayer will need to conduct his or her trading business in a pass-through entity, and the entity will have to qualify for trader tax status (TTS), which is business expense treatment. Further, the company may need to elect Section 475 MTM ordinary income or loss treatment, as capital gains in the entity may not qualify for the preferential business tax rate.

If the entity trades Section 1256 contracts, it may be attractive to file an election for Section 475 ordinary gain or loss treatment, forgoing the lower 60/40 capital gains rates, to qualify for the preferential business tax rate. The tax cuts may exclude capital gains in pass-through entities from using the business rate. Conversely, if the business rate is higher than 15%, some traders may fare better with Section 1256 60/40 capital gains, considering the lower capital gains rates (Trump plan) or preference excluding 50% of long-term capital gains, dividends, and interest (House plan). (60/40 means 60% is a long-term capital gain and 40% is a short-term capital gain.) Hopefully, tax reform won’t repeal 60/40 benefits.

If the tax cuts preclude a trading entity from the business rate, then perhaps a dual entity structure will work. A trading general partnership with TTS pays an administration fee and profit allocation to a management company that does qualify for the business rate. (Trump promised to repeal carried interest or profit-allocation tax breaks for hedge fund and private equity managers in his tax plan.)

The current tax strategy for business traders of paying reasonable compensation in an S-Corp to create earned income for employee benefit deductions may not be wise if all income is subject to the lower business rate, as paying salary converts business income to ordinary income.

Alternatively, if the business rate applies to undistributed income only, and the owner needs a salary to cover living expenses, then it may be wise for the S-Corp to continue with officer compensation and employee benefit plans. Salary and profit distributions may be taxable at ordinary rates.

Depending on how Congress writes the law, a partnership tax return might be better than an S-Corp since S-Corps are supposed to have reasonable compensation, which traders may seek to avoid to maximize use of the 15% rate. Partnerships don’t pay wages to partners; they use guaranteed payments, although a trading company should not have guaranteed payments.

Other good moves
There may be a rush of employees to qualify as independent contractors, which are sole proprietor businesses, so they also can utilize the preferential business tax rate vs. the higher ordinary rate on wages. (Sole proprietor contractors owe self-employment tax on net income, which includes FICA and Medicare.) That can encourage employees to become entrepreneurs.

Our firm is gearing up for possible tax reform, and we will stay on top of it for our clients. It could be a huge monkey wrench thrown into the tax code. That reminds me of another reason I don’t like the Senate nuclear option; it’s temporary tax changes, and that causes havoc in and of itself. Think Obamacare.

(For comparisons of the Trump and House tax cut plans, read Trump’s Tax-Cut Plans May Draw Congress to Art of the Deal and What Donald Trump’s Proposed Tax Cut Means For You.)

My partner Darren Neuschwander, CPA contributed to this blog post. Mr. Neuschwander expects the Republicans to use reconciliation to pass tax reform early in 2017.

 


If You Trade Around The World, You Need To Know IRS Rules

October 5, 2016 | By: Robert A. Green, CPA

ForbesSmall

Green’s blog post in Forbes.com

 

U.S. traders move abroad; others make international investments and non-resident aliens invest in the U.S. How are their taxes handled?

When it comes to international tax matters for traders, focus on the following:
  • U.S. resident traders living abroad
  • U.S. resident traders with international brokerage accounts
  • Report of foreign bank and financial accounts
  • IRS Offshore Voluntary Disclosure Program
  • Foreign retirement plan elections and reporting
  • Foreign assets reported on Form 8938
  • U.S. traders move to Puerto Rico to escape capital gains taxes
  • Renouncing U.S. citizenship or surrendering a green card
  • Non-resident aliens are opening U.S. brokerage accounts, and
  • Foreign partners in a U.S. trading partnership can be tax-free

U.S. resident traders living abroad
U.S. tax residents are liable for federal tax on worldwide income whether they live in the U.S. or a foreign country. If you qualify for “bonafide” or “physical residence” abroad, which is living abroad for an entire tax year, try to arrange Section 911 “foreign earned income” benefits on Form 2555. Avoid double taxation by paying tax in both a foreign country and the U.S. by availing yourself of foreign tax credits reported on Form 1116. If you live in a country which charges higher taxes than the U.S., sometimes it makes sense to skip the Section 911 exclusion and use just the foreign tax credit.

The Section 911 exclusion on foreign earned income is $101,300 for 2016, an amount the IRS raises each year. There is also a housing allowance along with maximum amount (cap) per location. The problem for traders is that capital gains and trading gains are not “foreign earned income” so they are unable to utilize Section 911 benefits. There is a solution: Traders with trader tax status (TTS) can form a Delaware S-Corp to pay officer compensation, and that compensation is foreign earned income. U.S.-based traders with TTS use an S-Corp to create “earned income” to unlock health insurance and retirement plan deductions. Add the foreign earned income exclusion and housing allowance to that list. Before committing to the S-Corp solution, compare expected net income tax savings, minus payroll tax costs vs. using a foreign tax credit.

The U.S. has tax treaties with many countries, and these agreements specify which country is entitled to collect tax on different types of items, like retirement plan distributions. Cite a tax treaty provision to override a regular tax on Form 8833. Its important to note that tax treaty provisions are used to reduce tax liability; the IRS may not use them to increase a tax.

U.S. resident traders with international brokerage accounts
Many traders living in the U.S. have a foreign brokerage account. It’s complicated when traders open these accounts held in a foreign currency. Counterparties outside the U.S. do not issue Form 1099-B, and accounting is a challenge. Traders should separate capital gains and losses, including currency appreciation or depreciation, from changes in currency values on cash balances, which are Section 988 ordinary gain or loss.

Some foreign brokers encourage traders to form foreign entities as a requirement to get access or to set up an account. Look before you leap: Tax compliance for an international entity is significant, and there are few to no tax advantages for traders. International tax compliance is very complex, and theres a risk of messing up tax reporting. Its very rare to achieve material deferral on foreign income, and there are plenty of tax penalties for non-compliance. But all this being said, there are plenty of good reasons to trade foreign markets. Just get the right advice beforehand and make sure the reason to do so is compelling.

Report of foreign bank and financial accounts
U.S. residents with a foreign bank, brokerage, investment and another type of account (including retirement and insurance in some cases) who meet reporting requirements must e-file FinCEN Form 114, Report of Foreign Bank and Financial Account (known previously as Foreign Bank Account Reports or “FBAR”). If your foreign bank and financial institution accounts combined are under $10,000 for the entire tax year, you fall under the threshold for filing FinCEN Form 114.

Filing due date changed: A new law enacted on July 31, 2015, changed the due date from June 30 to April 15 starting with 2016 filings in 2017. Congress added an automatic extension for six months to Oct. 15 to coordinate FinCEN Form 114 with individual income tax returns.

In recent years, we have learned that many taxpayers omitted foreign bank account reports when they should have filed them. Many taxpayers just didnt realize it. Some had financial interests in family accounts offshore if they were foreign nationals before moving to the U.S. Or some taxpayers married a foreign person gaining that financial interest. Others may have international retirement or insurance accounts that they never realized were subject to FBAR reporting.

The FBAR rule states “a financial interest in, signature authority or other authority over foreign financial accounts.” Traders and executives of hedge funds and other financial institutions and trustees typically have signature authority or other authority over foreign financial accounts triggering FBAR filings for them.

Most taxpayers owning foreign accounts reported their foreign income and were not trying to cheat the IRS by hiding it offshore. Because they reported foreign income correctly, many are allowed to file a late FBAR and avoid penalties. Otherwise, there is a highly complex and nuanced penalty regime in connection with late or incorrect FBAR filings.

IRS Offshore Voluntary Disclosure Program
Consider entering the IRS Offshore Voluntary Disclosure Program (OVDP), which has been extended to encourage taxpayers to come clean before getting busted by the IRS. The OVDP penalties are high (though there are exceptions). Its not amnesty by any means and its an expensive undertaking with tax attorneys and accountants. But if you wait to get busted by the IRS, your foreign bank or anyone else, the penalties are far higher. Criminal penalties may apply too unless you join the program first. The current OVDP program has no end date, but the IRS has explicitly stated it may revoke it at any time. On July 1, 2014, the IRS created a “streamlined” program for those taxpayers who were negligent in not filing FBARs (but did not do so on purpose). U.S. resident taxpayers pay just a 5% penalty with this streamlined program.

While OVDP is a good plan for some (such as tax cheats in serious potential trouble), its often not appropriate for those discussed earlier who reported their income but just missed an FBAR filing.

Its wise for American taxpayers to turn themselves in before getting busted. It can make a significant difference in treatment and penalties.

Foreign retirement plan elections and reporting
Dont assume international retirement plans are like U.S. pension plans with tax deferral on income until you take taxable distributions. For U.S. tax purposes, the IRS considers many international retirement plans taxable investment accounts because they aren’t structured as qualified plans under Section 401 unless they qualify under Section 402(b) as an employeestrust established by an employer. While that seems unfair and counterintuitive to many, it’s the rule, and it catches many unsuspecting taxpayers and accountants off guard. To the extent that Section 402(b) does not apply, you may have to pay a high Passive Foreign Investment Company (PFIC) tax. Include these retirement plans on the annual FinCEN Form 114 each year, whether or not the plan has deferral.

In October 2014, the IRS acknowledged the tax-deferral problem on Canadian retirement plans and provided assistance. In Revenue Procedure 2014-55, the IRS repealed the need for filing a tax election, which means Canadian retirement plans automatically qualify for tax deferral. These rules are retroactive, so it abates back taxes, interest, and penalties. It’s no longer needed to file Form 8891 (U.S. Information Return for Beneficiaries of Certain Canadian Registered Retirement Plans). This relief does not apply to international retirement plans outside of Canada.

Foreign assets reported on Form 8938
Tax Form 8938 is more about giving the IRS a heads up regarding your international assets. Its not about reporting income and loss — there are other tax forms for that. The filing threshold for Form 8938 is materially higher than the FBAR threshold, and its even higher for Americans living out of the country. (See Form 8938 instructions.)

U.S. traders move to Puerto Rico to escape capital gains taxes
Puerto Rico (PR) is not a state or foreign country; its a “possession” with a government and tax system (Hacienda). Residents of PR report particular types of income to Hacienda and other forms of revenue to the IRS. Trading gains are capital gains on “personal property” taxed where the sellers tax home is.

PR enacted tax incentive acts that are tailor-made for traders/investors, investment managers, and financial institutions. Passed in 2012, PR Act 22 allows investors and traders with bona fide residence in Puerto Rico to exclude from PR and U.S. taxes under Section 933 100% of all short-term and long-term capital gains from the sale of personal property accrued after moving there. Personal property includes stocks, bonds, and other financial products. Act 22 does not require investment in Puerto Rican stocks and bonds; trades can be made with a U.S. broker or on any exchange around the world. This capital gain tax break applies to professional traders using the default realization method, or Section 475 MTM.

There is a different PR tax incentive act for investment managers, who charge advisory fees. They sell their services to investors outside of PR and hence they can qualify for PR Act 20 tax incentives for “export service businesses.” The Act 20 tax incentive is a 4% flat tax rate on net business income. The owner also receives Act 22 100% exclusion on dividends received from the PR business entity, and exclusion from U.S. tax, since Section 933 excludes PR-sourced dividends.

On Nov. 30, 2015, PR enacted Act 187-2015 amending Acts 22 and 20 to stiffen the requirements. For Act 22 incentives, PR requires new applicants after Dec. 1, 2015, to purchase residential property in PR within two years and open a deposit account. For Act 20 incentives, PR requires gradually hiring five full-time employees in PR.

These PR tax benefits are not easy to arrange. Moreover, the political and economic conditions are uncertain, to say the least.  Traders and investment managers need to move their family and operations to PR to get these tax breaks while they retain the benefit of U.S. citizenship with a passport.

Renouncing U.S. citizenship or surrendering a green card
Some countries have much lower tax rates than the U.S. and a few countries exempt capital gains from tax. Increasingly, traders, investment managers, and other taxpayers are surrendering their U.S. resident status (citizenship or green card), which requires potentially paying a Section 877A expatriation tax. The expatriation tax only applies to “covered expatriates” who have a net worth of $2 million or 5-year average income tax liability exceeding $139,000. The IRS assesses the expatriation tax on unrealized capital gains on all assets — fair market value less cost-basis including debt — on the expatriation date. Only the net amount over $600,000 is taxable. Deferred compensation and IRAs are included and taxable, too.

While the expatriation tax is likely to take a big tax bite out of the wealthy, it wont apply to the majority of online traders who may not have significant unrealized net gains and who are not covered expatriates. There are other tax issues to consider including U.S. real property and estate planning in connection with beneficiaries residing in the U.S. Learn more about the expatriation tax on IRS Form 8854. Theres an election to defer tax, and regular income tax rates apply.

Non-resident aliens are opening U.S. brokerage accounts
Non-resident aliens are subject to tax withholding on dividends, certain interest income and sales of master limited partnerships like energy companies. They have U.S. source income — effectively connected income (ECI) — on real property and regular business operations located in the U.S.

A non-resident alien living abroad can open a U.S.-based forex or futures trading account and not owe any capital gains taxes in the U.S. U.S. tax law has long encouraged foreign taxpayers to invest and trade in U.S. financial markets. Caveat: the exclusion does not benefit dealers. A non-resident alien living abroad can also open a U.S.-based securities account, but there could be some dividend tax withholding. If the non-resident spends more than 183 days in the U.S., he owes taxes on net U.S. source capital gains, even though he may not trigger U.S. residency under the substantial presence test. (U.S. residency is triggered with legal residence status or by meeting the substantial presence test.) There are exemptions from the 183-day capital gains tax rules for employees of foreign governments living in the U.S. and special rules for students temporarily in a school in the U.S. The non-resident alien doesnt need a U.S. tax identification number and isn’t required to file a U.S. non-resident tax return, Form 1040NR. As a non-resident alien individual, fill out W-8BEN and furnish it to the broker.

Some U.S. brokerage firms ask non-resident aliens to establish a U.S. entity for opening a U.S.-based brokerage account. Often, the non-resident alien chooses a single-member LLC (SMLLC) formed in Delaware, and it files a W-8BEN-E with the broker. As a disregarded entity, the SMLLC activity is part of the individuals activity, which is not U.S.-source income on trading income. Many non-resident aliens run into obstacles when trying to repatriate money to their home country, as the broker may not permit international payments. These non-resident aliens also have trouble establishing U.S. bank accounts for the entity without a U.S. presence or address.

Foreign partners in a U.S. trading partnership can be tax-free
If the non-resident is a member of a U.S.-based “pass through” taxable entity — such as a hedge fund or proprietary trading firm — that person is still exempt from effectively connected income. Typically, foreign partners in U.S. partnerships are considered to have U.S. ECI on their Schedule K-1 income. But if the partnership is a trading company — in financial markets, not goods — the income is considered portfolio income, including the partners share. Typically, U.S. partnerships withhold taxes on foreign partners, but that is not required if the foreign partner only has portfolio income not subject to U.S. tax. It gets more complicated with dividends in the partnership since dividends tax isnt withheld for the share owned by the foreign partner.

International tax matters are complicated and often involve tax planning between the U.S. and one or more foreign countries or possessions. There are significant international opportunities for income and tax savings, but many pitfalls and compliance rules, too. Dont try to cheat on your taxes by hiding assets and income offshore; the IRS has extensive operations around the world to bust tax cheats. Engage tax attorneys and CPAs with extensive international experience, so it works out well.

GNMTraderTax attorneys Mark Feldman and Roger Lorence, and CPA Deborah King contributed to this content.

This content is an updated version of International Tax Matters in “Green’s 2016 Trader Tax Guide.”

Webinar/Recording: If You Trade Around The World, You Need To Know IRS Rules.

 


Short Selling: How To Deduct Stock Borrow Fees

September 19, 2016 | By: Robert A. Green, CPA

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How To Deduct Borrowing Fees When Selling Stocks Short

Traders like to go long and short to play both sides of the market. The IRS has special tax rules for short sellers, and in this blog post, I focus on how to deduct stock borrow fees vs. interest expenses.

Stock borrow fees and loan premiums
Short selling is not free; a trader needs the broker to arrange a loan of stock from another account holder. Brokers charge short sellers “stock borrow fees” or “loan premiums.” Tax research indicates these payments are “fees for the temporary use of property.” Watch out: Many brokers refer to stock borrow fees as “interest expense,” which confuses short sellers.

For tax purposes, stock borrow fees are Section 212 “investment expenses” for investors and Section 162 business expenses for traders qualifying for trader tax status (TTS). Stock borrow fees are not “interest expense” so investors can’t include them in Section 212 “investment interest expense” deductions. It’s a significant distinction that has a profound impact on tax returns because investment expenses face greater limitations vs. investment interest expenses.

Support for this tax position
According to New York City tax attorney Roger D. Lorence: “Short sale expenses (stock borrow fees) are not investment interest expense. To support any interest deduction, there must be a valid interest-bearing obligation under state or federal law. (See Stroud v. U.S.) The IRS has ruled that short sales do not give rise to an interest-bearing indebtedness (Revenue Ruling 95-8, 1995-1 CB 107). Rather, the short sale borrower has a liability under state law to return the borrowed stock and pay fees, but this is not interest expense. This is why short sales do not give rise to Section 514 UBIT (no debt-financed property), which is the specific code section in issue in the ruling. The revenue ruling is based on Deputy v. du Pont. The du Pont case applies by analogy here because there can be no interest expense generated in a short sale.”

Investors face limitations on tax deductions
Investors are entitled to deduct Section 212 investment expenses including “investment interest expenses” and “investment expenses” reported on Schedule A (itemized deductions).

It’s important to differentiate between investment interest expenses vs. investment expenses because they have different tax treatments. Taxpayers carry over unused investment interest expense to the subsequent tax year(s), whereas they may not carry over unused investment expenses, which means they may entirely lose some of those. Calculate investment interest expense on Form 4952 where it’s limited to net investment income, with the balance carried over. Net investment income is portfolio income minus investment expenses. (Read Form 4952 instructions for further details.)

Investment expenses are “miscellaneous itemized deductions” in excess of 2% of adjusted gross income (AGI), and they are not deductible for the alternative minimum tax (AMT). Most itemized deductions are subject to a phase-out for the upper-income brackets (known as the Pease limitation, indexed for inflation); some taxpayers are better off using the standard deduction than the itemized deduction.

MORE: Tax treatment for selling short

Easy vs. hard to borrow fees
Very liquid securities are “easy to borrow,” and many brokers charge small fees to short sellers for lending out those shares. Non-liquid securities are “hard-to-borrow” and brokers update their “hard to borrow lists.” Brokers charge higher “hard to borrow fees,” and most publish those rates with sample calculations on their websites. Hard to borrow fee rates rise as demand for shorting increases. A few brokers specialize in finding very hard to borrow stocks, and they charge “up front borrow fees” in addition to hard to borrow fees.

Brokers conflate stock borrow fees with interest expenses
There is a lack of clarity in separating stock borrow fees from interest expenses. The distinction matters since fees are investment expenses, whereas interest is an investment interest expense.

I wonder if some brokers prefer using the term interest expense since customers may find that more logical with borrowing shares under securities lending agreements, and because it leads to better tax treatment. Customers may also object to paying significant fees.

For example, one leading online broker calls the “interest rate charged on borrowed shares” a “fee rate” and also “net short stock interest.” This broker does not report the fees on Form 1099.

A few other online brokers mention interest on shorted shares as a “fee rate.” They report “miscellaneous non-reportable deductions” on Form 1099; not interest expense.

One of the largest online brokers states on its website: “When you borrow the shares, you pay interest to the brokerage house for this loan, and the harder the shares are to find, the higher the interest rate.” I called customer support, and a support person admitted it’s a stock borrowing fee and not interest expense.

It would be helpful if brokers cleaned up their language to be clear about stock borrow fees vs. interest expense.

poll

Do you do short selling?

Active traders using Section 475 have it easy
Active traders qualifying for trader tax status (TTS) with a Section 475 election have an easy time reporting short-sale trades and related expenses, and they maximize tax advantages. They are unaffected by special rules for short sales for constructive sales on appreciated positions and holding period rules. (Section 475 is tax beneficial because it exempts traders from the $3,000 capital loss limitation against other income, wash-sale losses, and short sale adjustments.)

With Section 475 mark-to-market accounting, traders impute sales at year-end on open positions. That negates the need to make “constructive sales on appreciated positions” from selling short against the box. Short-term vs. long-term holding periods are not an issue with Section 475. TTS unlocks Section 162 business expense treatment, so expenses related to selling short (including stock borrow fees and interest expense) are deductible as business expenses from gross income. Sole proprietors use Schedule C for reporting business expenses.

Example of a trader with TTS
I recently worked with a client who had a $800,000 net short-term capital gain from selling short during 2015 and $500,000 of stock borrow fees (probably high for a short seller). He hoped the effect on his taxable income would be $300,000 ($800,000 less $500,000) as that was his economic gain. But, his accountant told him taxable income was considerably higher after applying itemized deduction limitations and the AMT preference for investment expenses. The client qualified for TTS, and therefore could report his stock borrow fees along with other trading business expenses on Schedule C. His taxable income effect was under $300,000.

But, his Schedule C would look like an enormous red flag since it reported trading business expenses only, and that amount was a loss over $500,000. He entered capital gains and losses on Form 8949, transferred to Schedule D. In Green’s 2016 Trader Tax Guide, I suggest moving a portion of business trading capital gains to Schedule C to zero it out. We also recommend a footnote explaining that the taxpayer is profitable and the transfer of income to Schedule C. Additionally, the note explains what trader tax status is by law, how the client qualified for TTS, and how to treat selling-short expenses.

Example of an investor
Another client has a net capital loss of $100,000. After the $3,000 capital loss limitation against other income, he has negative taxable income, which means he will not get any tax benefit from his investment expenses, which include stock borrow fees.

Webinar/Recording: Short Sellers: IRS Tax Rules Are Unique

Short Selling: IRS Tax Rules Are Unique

| By: Robert A. Green, CPA

ForbesSmall

IRS Short Selling Rules Can Be A Taxing Matter

The essence of trading is buying and selling financial products for income. If you think the asset will rise in value, buy first and sell afterward — this is what’s known as a “long position.” If you want to speculate on the asset declining in value, borrow the security to sell it first, and buy it back later to close the short position — this is “selling short.” (There are other ways to speculate on market drops like buying put options or inverse ETFs, both of which are long positions.)

In this blog post, I cover the tax treatment for selling short. There are two types of short sales: (1) a short sale and (2) a short sale against the box. Both involve borrowing securities from another account holder, arranged by a broker.

Constructive sales on appreciated positions
In the old days, owners stored stock certificates in safe deposit boxes. They could borrow and sell securities, but not the ones stored in their box — hence the moniker, “short sale against the box.” It became a popular tax shelter to defer capital gains taxes.

The Taxpayer Relief Act of 1997 mostly closed the deferral loophole by adding new Section 1259 Constructive Sales Treatment For Appreciated Financial Positions. Before these changes, a trader could own security A with a large unrealized capital gain and short it against the box before year-end to economically freeze the capital gain, but defer realization of the capital gain until the following year. Exception: A trader can still achieve tax deferral on an open short against the box position at year-end if he buys to cover the open short position by Jan. 30 and leaves the long position open throughout the 60-day period beginning on the date he closes the transaction — so there is an economic risk.

An example from Pub. 550 Investment Income and Expenses, Short Sales:
“On May 7, 2015, you bought 100 shares of Baker Corporation stock for $1,000. On September 10, 2015, you sold short 100 shares of similar Baker stock for $1,600. You made no other transactions involving Baker stock for the rest of 2015 and the first 30 days of 2016. Your short sale is treated as a constructive sale of an appreciated financial position because a sale of your Baker stock on the date of the short sale would have resulted in a gain. You recognize a $600 short-term capital gain from the constructive sale and your new holding period in the Baker stock begins on September 10.”

The constructive sale rules apply on substantially identical properties, which includes equities, equity options (including put options), futures and other contracts. For example, Apple equity is substantially identical with Apple call and put equity options. Traders use a bevy of financial products, and they may inadvertently trigger Section 1259 constructive sales. Report gains on constructive sales, not losses.

Brokers do not report constructive sales on appreciated positions on Form 1099-Bs. Traders need to make manual adjustments on Form 8949. I recommend using tax-compliant software or a service provider that uses a tax-compliant software.

poll

Do you do short selling?

Special rules for short-term vs. long-term capital gains and losses
Most traders understand capital gains rules for long positions. For securities using the realization method, a position held for 12 months or less is a short-term capital gain or loss subject to marginal ordinary tax rates (up to 39.6% for 2015 and 2016). A position held for more than 12 months is a long-term capital gain with lower capital gains tax rates (up to 20% for 2015 and 2016).

According to Pub. 550, “As a general rule, you determine whether you have short-term or long-term capital gain or loss on a short sale by the amount of time you actually hold the property eventually delivered to the lender to close the short sale.”

If you sell short without owning substantially identical property (stock or option) in your account, the holding period starts when you later buy the position to close the short sale. The holding period is one day, so it’s a short-term capital gain or loss. Most investors think selling short is the reverse of going long and the holding period should start on the date you short the security — but that is not the case.

Holding period rules are more complicated when you short against the box. Special anti-abuse rules contained in Section 1233 prevent traders from converting short-term capital gains into long-term capital gains and long-term capital losses into short-term capital losses.

Special Rules in IRS Pub. 550.
“Gains and holding period. If you held the substantially identical property for 1 year or less on the date of the short sale, or if you acquired the substantially identical property after the short sale and by the date of closing the short sale, then:

  • Rule 1. Your gain, if any, when you close the short sale is a short-term capital gain, and
  • Rule 2. The holding period of the substantially identical property begins on the date of the closing of the short sale or on the date of the sale of this property, whichever comes first.

Losses. If, on the date of the short sale, you held substantially identical property for more than 1 year, any loss you realize on the short sale is a long-term capital loss, even if you held the property used to close the sale for 1 year or less. Certain losses on short sales of stock or securities are also subject to wash sale treatment.”

Dividends and “payments in lieu” of dividends
When traders borrow shares to sell short, they receive dividends that belong to the lender, the rightful owner of the shares. After the short seller receives these dividends, the broker uses collateral in the short seller’s account to remit a “payment in lieu of dividend” to the rightful owner to make the lender square in an economic sense. But there are complications which may lead to higher taxes.

Dividend issues for the short seller
If a short seller holds the short position open for 45 days or less, add the payment in lieu of dividend to cost basis of the short sale transaction reported on Form 8949 (realization method) or Form 4797 (Section 475 MTM method). Watch out for a capital loss limitation. (Traders with trader tax status using Section 475 are not concerned as they have ordinary loss treatment.)

If a short seller holds the short sale open for more than 45 days, payments in lieu of dividends are deductible as investment interest expense. Report investment interest expense on Form 4952. Watch out, because the current year tax deduction is limited to net investment income, which includes portfolio income, minus investment expenses. (See Form 4952 instructions.) Carry over disallowed investment interest expense to the subsequent tax year(s). With itemized deduction limitations, some short sellers come up short on investment interest expense deductions. (If a short seller holds the short sale open for more than 45 days, in connection with a trading business with TTS, payments in lieu of dividends are deductible as business expenses.)

Dividend issues for the lender
When investors sign margin account agreements, few realize they are authorizing their broker to lend their shares to short sellers. Instead of issuing the account owner (lender) a Form 1099-DIV, which may include ordinary and qualified dividends, the broker issues a Form 1099-Misc or similar statement for “Other Income.” The lender forgoes the qualified dividends tax break on common stock held at least 60 days. Lower capital gains rates apply on qualified dividends.

Lenders report this substitute dividend payment as “Other Income” on line 21 of Form 1040. Don’t overlook including substitute dividends in investment income entered on Form 4952 used to limit investment interest expense. Some brokers offer to compensate lenders for losing the qualified dividend rate. Institutional or large stock lenders may earn credit interest on lending out their shares.

In my next blog post, I cover how to deduct stock borrow fees.

Webinar/Recording: Short Sellers: IRS Tax Rules Are Unique.

MORE: IRS Pub. 550 Short Sales

MORE: Section 1.1233-1 – Gains and losses from short sales

MORE: 1259 – Constructive sales treatment for appreciated financial positions


These Tax Errors Will Cost Professional Traders Dearly

August 10, 2016 | By: Robert A. Green, CPA

ForbesSmall

Read my blog post in Forbes.

Most active traders make serious errors on income tax returns, whether they self-prepare or engage a local accountant. Many miss out on trader tax benefits and overpay on their taxes. The cost ranges from $5,000 to hundreds of thousands of dollars.

When you shop for a tax preparer, ask about trader tax status, Section 475 elections, wash sale loss rules, and tax treatment for forex, options, Section 1256 contracts, ETFs, and ETNs. If they look like a deer caught in headlights, you’ll realize that your tax professional is not proficient enough for your needs. CPAs have a code of ethics requiring them to decline an engagement if they are not proficient, but local tax storefronts do not.

Here’s my 2016 list of tax reporting errors made by traders and accountants.

1. Mistakenly believing you can rely on securities Form 1099-B:

Most preparers rely on broker Form 1099-B for tax reporting. There’s a problem with wash sales. A wash sale loss is tax-deferred when you buy back a security position 30 days before or after making a sale at a loss.

Here’s the problem with wash sales reported on the 1099-B: IRS rules for brokers are simple, and most people do not realize that IRS rules for taxpayers are different and more complex. Tax preparers choose to play ignorant and import 1099-B, so it’s easy to reconcile Form 8949 with 1099-B. That means they are using broker rules and willfully disregarding Section 1091 rules for taxpayers. They should use trade accounting software that is compliant with taxpayer rules.

Broker rules base wash sales on identical positions, per account. Taxpayer rules base wash sales on substantially identical positions, across all accounts, including IRAs. A broker does not calculate a wash sale on Apple equity vs. Apple options because they are not identical symbols, but taxpayers must do so because they are substantially identical positions.

With education, traders can avoid wash sale losses. That is better than ignoring taxpayer rules and playing the audit lottery with the IRS.

2. Messing up Form 8949 cost-basis reporting:

The IRS requires reporting each securities trade on Form 8949 with the description, dates acquired and sold, proceeds, cost basis, code, adjustments, and gain or loss.

The primary adjustment is for wash sales. Other cost-basis adjustments include corporate actions (stock splits and reinvested dividends), inherited positions, gifts, and transfers from other accounts. Taxpayers often use incorrect amounts for these items.

There is one scenario where a taxpayer can solely rely on a 1099-B and skip filing Form 8949 by entering 1099-B amounts on Schedule D: when the taxpayer has only one brokerage account and trades equities only with no trading in equity options, which are substantially identical positions. Plus, the taxpayer must not have any wash sale loss or other adjustments.

However, if you trade options and equities, which are substantially identical positions, and/or you have multiple brokerage accounts, including IRAs, then you need trade accounting software that’s compliant with Section 1091 to generate Form 8949. Most software available through brokerage websites are not compliant with taxpayer rules in Section 1091. Download the original trade history from your broker’s website into a compliant program to generate Form 8949 or Form 4797 with Section 475.

3. Overlooking trader tax status or messing it up on Schedule C:

Most tax preparers and tax software do not offer resources about trader tax status (TTS) and related tax benefits. Other CPAs tell me they didn’t even realize their long-term clients had started a trading business. They thought trading was an investing activity using Section 212′s investment expense and the capital gains and loss treatment.

Overlooking qualifications for TTS can cost a trader $5,000 to $15,000 or more in tax benefits due to the preference of Section 162′s business expense treatment on Schedule C vs. Section 212′s restricted expense treatment on Schedule A.

Some accountants err in reporting trading income and losses on Schedule C. They should list trading business expenses only on Schedule C. Traders report trading gains and losses on different tax forms, including Form 8949 for securities, Form 6781 for Section 1256 contracts, and Form 4797 for Section 475 trades.

Traders should include well-written statements with their tax returns explaining TTS, how they qualify, tax treatments, and elections made. They should ask the IRS to view their trading business as a collection of tax forms. Otherwise, the IRS may see Schedule C as a losing business without any revenue. Most preparers do not include footnotes, and if they do, they tell the wrong story.

Don’t fall into the hobby loss or passive activity loss trap: Do not let a preparer or IRS agent subject your trading business to Section 183 hobby loss disallowance rules because it’s not recreational or personal in nature. A trading company is also exempt from Section 469′s passive activity loss rules by the Section 469 “trading rule.”

Recent trader tax court cases served up significant losses to traders. The IRS caught traders trying to deduct capital losses as ordinary losses. Net capital losses are limited to $3,000 per year on Schedule D, and excess capital losses should be carried over to subsequent tax year(s) on Schedule D. Ordinary loss treatment for trading losses is possible if a trader with TTS timely elects Section 475. In that case, report Section 475 trading losses on Form 4797 Part II, not on Schedule C.

A trader can claim TTS business expense treatment after-the-fact, and the IRS does not require an election. Preparers often conflate TTS with Section 475, but that’s a mistake. A trader with TTS has the option to elect Section 475, but many choose not to do so.

4. Overlooking or messing up a Section 475 election:

A trader qualifying for TTS may elect Section 475 MTM with ordinary gain or loss treatment. Report Section 475 trades on Form 4797 Part II, rather than on Form 8949.

The main tax benefits of Section 475 are an exemption from wash sale loss adjustments and capital loss limitations. Ordinary business losses offset income of any kind, and they are part of net operating loss (NOL) carrybacks and or carryforwards.

One of the biggest pitfalls for traders is messing up the decision-making with a Section 475 election. If you have existing capital losses from a capital loss carryover, year-to-date realized capital losses, and unrealized capital losses, you may want to retain capital gains treatment. That’s because Section 475 is ordinary income, which can’t absorb capital loss carryovers. On the other hand, you don’t want additional capital losses that are unutilized.

Preparers err in making a decision too early, not waiting until the election deadline, which offers some hindsight. They do not understand they can make alternative plans: You can revoke Section 475 in a subsequent tax year or form a new entity for a “do over” on electing Section 475, within 75 days of inception. You can choose Section 475 on securities only and retain lower 60/40 capital gains tax rates on Section 1256 contracts.

Many preparers miss the deadline for filing a Section 475 election statement and Form 3115 (Change in Accounting Method). Any misstep invites the IRS to disallow Section 475. Read recent trader tax court cases on my blog, including on Poppe, Assaderaghi, Nelson, and Endicott.

5. Messing up Form 4797 and overlooking a Section 481(a) adjustment:

Report each Section 475 transaction on Form 4797. Mark-to-market reporting means you must impute sales of open securities positions at year-end based on market prices.

The Section 475 election process includes a Section 481(a) adjustment to convert from the realization (cash) method to the MTM accounting method, as of Jan. 1 of the election year. That adjustment is the unrealized gain or loss on the prior year-end open trading business positions. Negative Section 481(a) adjustments are reportable in full, but positive ones over $50,000 must be pro-rated over four years. Many preparers overlook or err in making this adjustment, and others forget about reporting the deferral income in subsequent years. If you don’t qualify for TTS in the prior year, there is no Section 481(a) adjustment.

6. Commingling Section 475 trades with investment positions:

If you use Section 475 on your trading account and also make investments in a segregated investment account, be sure not to trade the same symbols between the two accounts, as that gives the IRS an opening to reject some Section 475 losses, or to disallow some long-term capital gains. Both will raise your tax bill. Section 475 regulations require careful segregation of investments from Section 475 trades in form and substance. Most preparers are unaware of these nuances in Section 475, and they misadvise clients about how to stay clear of this trouble.

7. Overlooking or messing up capital loss carryovers:

Some self-preparers mistakenly think they should only report a 3k capital loss carryover each year since they figure that is all they can use against other income. That is wrong: Report the entire capital loss carryover on Schedule D, short term vs. long term. It is okay to have a capital loss that carries over again to the next tax year.

Others overlook entering a capital loss carryover. Some figure not reporting them until they have capital gains to use them up. However, it can become too late, since the capital loss carryover year closes after three years. The IRS does not allow a capital loss carryover unless you report it on your prior year’s tax return, so don’t let a capital loss carryover lapse. Capital loss carryovers do not expire.

Capital losses are unlimited against capital gains. Deduct up to $3,000 of net capital losses against other income. It’s automatic, and not optional. For example, carry over $50,000 of capital losses and use it against $30,000 of current year capital gains, leaving a $20,000 net capital loss. Use the $3,000 capital loss limitation against other income and carry over $17,000 of the remaining capital loss to the subsequent tax year.

8. Overlooking the election to carry back a Section 1256 loss:

Many preparers do not know they can elect to carry back a Section 1256 loss. Check that box on top of Form 6781 to report current year net losses on Form 1040X amended tax returns for the prior three tax years, in order of oldest year first. The loss can only offset Form 6781 gains, not other income.

9. Using the wrong tax treatment on various financial instruments:

Many preparers do not realize that some financial instruments require ordinary gain or loss treatment or qualify for lower 60/40 capital gains tax rates in Section 1256. Many preparers incorrectly think that all trading instruments use the realization method with short-term and long-term capital gains rates.

It’s wise to double-check your broker’s 1099-B reporting. For example, a few foreign futures received Section 1256 treatment in IRS revenue rulings. Otherwise, without that ruling, they are treated as securities.

Forex trading is an ordinary gain or loss by default, but traders may elect to opt out of Section 988 into Section 1256(g) on “major currencies” only, which means the U.S. future exchanges list the same pairs. The U.S. brokers do not issue a 1099-B for spot forex transactions. A trader must file a Section 988 opt-out election on a contemporaneous basis in a taxpayer’s books and records. That means internally as opposed to filing it with the IRS. You can file the election for the whole year or part of the year. Many preparers mess up forex tax treatment, and IRS and state agents are confused over the reporting, too.

Securities ETFs are usually registered investment companies (RICs). Selling a Securities ETF is deemed a sale of security. Many preparers make errors with commodities/futures ETFs, which are publicly-traded partnerships (PTPs). PTPs issue annual Schedule K-1s passing through Section 1256 tax treatment on Section 1256 transactions to investors, as well as other taxable items. Selling a commodities ETF is deemed a sale of security, calling for short-term and long-term capital gains tax treatment. Taxpayers invested in commodities/futures ETFs should make adjustments to cost basis on Form 8949 to capital gains and losses, ensuring they don’t double count Schedule K-1 pass through income or loss. The broker 1099-B will not make this adjustment for you. Options on ETFs are securities whereas options on commodity ETFs can be Section 1256 contracts.

Gold ETFs use the publicly traded trust (PTT) structure, which the IRS considers a disregarded entity. In effect, it’s like directly owning gold bullion. Precious metals are “collectibles” with higher long-term capital gain rates up to 28%. Collectibles held one year, and less are short-term capital gains. Many preparers make errors reporting transactions in precious metals.

Exchange-traded notes (ETNs) are prepaid forward contracts, and tax treatment calls for the deferral of taxes until sale. Alternative tax treatment is unclear on ETNs.

10. Mishandling foreign transactions:

Many Americans trade financial products on global exchanges. Some trade through a U.S. broker who reports all sales globally on Form 1099-B. Most U.S. brokers keep accounts for foreign transactions in U.S. dollars.

It is complicated when traders open an offshore brokerage account held in a foreign currency. Counterparties outside the U.S. do not issue Form 1099-B, and accounting is a challenge. Separate capital gains and losses with embedded currency fluctuation from currency fluctuation on cash balances. Many preparers make mistakes double counting some currency appreciation or depreciation.

Some brokers outside the U.S. encourage Americans to form a foreign entity to set up an offshore brokerage account. Look before you leap: Tax compliance for foreign entities is significant, and there are few to no tax advantages for traders. International tax compliance is very complex and often nuanced, and it’s risky if you mess up tax reporting. Most preparers are not proficient in international tax compliance for U.S. residents.

For U.S. residents, foreign bank, brokerage, investment and other types of accounts — including retirement and insurance in some cases — must be e-filed on FinCEN Form 114, Report of Foreign Bank and Financial Account. If your foreign bank and financial institution accounts combined are under $10,000 for the entire tax year, you fall under the threshold for filing. If you do need to e-file FinCEN Form 114, the deadline is June 30 of the following year. Many preparers overlook FinCEN Form 114, and the penalties can be very high for willful non-compliance.

11. Overlooking or double counting home office deductions:

Most traders with TTS have a room in their home used for business, but they omit home office deductions since they think it’s a red flag with the IRS. The reverse it true: Without a home office or outside office, it does not look like you operate a business.

Some self-preparers double count real estate taxes and mortgage interest deductions on Schedule A. They do not realize Form 8829 allocates the non-business portion of those deductions to Schedule A.

Other preparers wind up with a carryover of home office expenses, with no current year deduction, because they did not point Form 8829 to trading gains or transfer some trading gains to Schedule C as explained in Green’s 2016 Trader Tax Guide. Form 8829 deductions require income; that’s how the IRS keeps a lid on this deduction. Traders without TTS may not deduct home office expenses.

12. Deducting education expenses when not allowed:

New traders often incur significant education costs before they begin trading in live accounts and qualify for TTS. Many preparers incorrectly deduct education as a Section 212 investment expense on Schedule A. However, pre-business education is not deductible in Section 212 by Section 274(h)(7).

Education incurred after business commencement is a business expense. Try to capitalize pre-business education as part of Section 195 startup costs, which can be expensed $5,000 when business commences, with the rest amortized over 15 years. Include a reasonable amount going back six months.

13. Paying self-employment tax when not owed:

Some preparers treat net trading business income as self-employment income (SEI) subject to self-employment (SE) tax. That’s incorrect unless the trader is a full member of an options or futures exchange and trading Section 1256 contracts on that exchange (Section 1402i).

The full SE tax (15.3%) applies to the social security base ($118,500 for 2016). The Medicare portion (2.9%) is unlimited.

14. Deducting employee benefit plans when not allowed:

Preparers compound the above error by having the trader contribute to a retirement plan based on net trading business income. A taxpayer may contribute to a retirement plan if he or she has SEI or wages, but trading gains are not SEI. In this case, the trader is deemed to have an “excessive contribution” subject to tax penalties.

Preparers also mistakenly take an AGI deduction for self-employed health insurance premiums, which requires SEI.

If a trader wants employee benefit plan deductions, including health insurance and a retirement plan, he or she should consider an S-Corp pass-through entity tax return. The S-Corp pays officer compensation to unlock these deductions. Many preparers overlook year-end tax planning, which includes payroll and Solo 401(k) plan execution.

Some preparers err in deducting employer-provided health insurance like COBRA. For health insurance to be AGI-deductible, the medical insurance must be an individual or group plan associated with the business. Many preparers err in not adding the health insurance premiums to the S-Corp officer compensation Form W-2, and it’s not subject to payroll tax.

Watch our video: These Tax Errors Will Cost Professional Traders Dearly.


Trader Tax Battle Of The States: Nevada Vs. New Hampshire

July 15, 2016 | By: Robert A. Green, CPA

Click to read Green's blog post in Forbes.

Click to read Green’s blog post in Forbes.

Traders have unique tax issues on state and local income tax returns for business entities and individuals. Moreover, state and local tax regimes vary significantly. The preferred business entity for a trader is an S-Corp pass-through entity, which is free of entity-level federal taxation. Some states and cities subject S-Corps to taxation. (Read our recent blog post: A Few States Tax S-Corps: Traders Can Reduce It.)

In my five-part series “Trader Tax Battle Of The States,” I focus on state and local tax systems for S-Corps, LLCs, and partnerships. I mention basic information about individual income tax, estate and inheritance tax regimes. The numbers listed below are the states ranking by population.

35. Nevada:

NV enacted a Commerce Tax (CT), and the first fiscal year-end for this new tax regime is June 30, 2016. Per the CT sites below, “CT is imposed on businesses with a Nevada gross revenue (GR) exceeding $4,000,000 in the taxable year.” There are two exemptions applicable to a trading or investment company:

- “Passive entities are exempt if 90% of income is portfolio income, including capital gains from the sale of real property, gains from the sale of commodities traded on a commodities exchange and gains from the sale of securities.”

- Also exempt: “Intangible investments entity if it only owns and manages intangible investments, such as investments in other entities, bonds, patents, trademarks. Intangible investments include, without limitation, investments in stocks, bonds, notes and other debt obligations.”

COMMERCE TAX NEWS
COMMERCE TAX QUESTIONS AND ANSWERS
Exempt Status Entity Form for Exempt Entities registered with NV Secretary of State

NV does not have an individual income tax regime.

NV does not have an estate or inheritance tax system.

NV is one of the best states for traders.

42. New Hampshire:

NH has an 8.5% Business Profits Tax (BPT) “assessed on income from conducting a business activity within NH. Every business organization, organized for gain or profit carrying on business activity within the state is subject to this tax. However, organizations with $50,000 or less of gross receipts from all their activities are not required to file a return,” per Taxpayer Assistance – Overview of New Hampshire Taxes.

NH includes trading gains in gross receipts.

If you expect net trading gains of more than $50,000, forming an entity for your trading business in NH is unwise, since NH does not tax individuals on capital gains.

NH also has a 0.75% Business Enterprise Tax (BET) assessed on the Enterprise Value Tax Base (EVTB). The base is the “sum of all compensation paid or accrued, interest paid or accrued, and dividends paid by the business enterprise, after special adjustments and apportionment,” per above NH site.

NH has a limited individual income tax regime: A 5% tax on interest and dividend income, and no taxes on wages, capital gains, and other personal income.

NH does not have an estate tax or inheritance tax.

This blog post completes our five-part series “Trader Tax Battle Of The States.”

Attend our Webinar or watch the recording afterward: Trader Tax Battle Of The States.


Trader Tax Battle Of The States: New Jersey, Washington & Massachusetts

July 14, 2016 | By: Robert A. Green, CPA

Click to read Green's blog post in Forbes.

Click to read Green’s blog post in Forbes.

Traders have unique tax issues on state and local income tax returns for business entities and individuals. Moreover, state and local tax regimes vary significantly. The preferred business entity for a trader is an S-Corp pass-through entity, which is free of entity-level federal taxation. Some states and cities subject S-Corps to taxation. (Read our recent blog post: A Few States Tax S-Corps: Traders Can Reduce It.)

In my five-part series “Trader Tax Battle Of The States,” I focus on state and local tax systems for S-Corps, LLCs, and partnerships. I mention basic information about individual income tax, estate and inheritance tax regimes. The numbers listed below are the states ranking by population.

11. New Jersey:

NJ has an S-Corp Minimum Tax (MT) based on NJ gross receipts (GR), which includes net trading gains. It is $375 for less than $100,000 GR, $562.50 for less than $250,000 GR, $750 for less than $500,000 GR, $1,125 for less than $1M GR, and $1,500 if $1M GR or more. See S Corporation – MINIMUM TAX on Corporation Business Tax Overview.

NJ has a Partnership Filing Fee: “For New Jersey Gross Income Tax purposes, every partnership or limited liability company (LLC) that has income from sources in the State of New Jersey, or has a New Jersey resident partner, must file the New Jersey Partnership return, Form NJ-1065. The $150/partner fee is not to exceed $250,000 for each partnership with more than two partners. Assessed on partnerships with more than two partners AND having income or loss derived from New Jersey sources…,” per Partnership Filing Requirements.

NJ has a progressive individual income tax system, and the top rate is 8.97% on income over $500,000.

NJ individual income tax rates are lower than New York State/City rates, but many traders pay higher taxes in NJ because it does not allow deductions for most losses*. That includes business losses, caused by trading business expenses, net capital losses and net Section 475 ordinary trading losses. NJ only allows certain itemized deductions. NJ’s restrictions on deductions translate to higher effective tax rates. Many traders have net losses in some years, and they do not find tax relief in NJ.

*NJ Notice: “ALTERNATIVE BUSINESS CALCULATION DEDUCTION FOR CERTAIN BUSINESS ENTITIES CONSOLIDATION AND CARRYFORWARD. Effective for tax years beginning on or after January 1, 2012, (NJ) establishes an alternative business calculation deduction under the New Jersey Gross Income Tax Act with the intent of giving income tax relief to taxpayers with business losses. The new legislation provides a deduction which uses a calculation that consolidates business income and/or loss and allows taxpayers to carry forward unutilized losses.” (See examples in the notice.)

NJ has an estate tax rate up to 16% and an exemption of $675,000, which is the lowest exemption in the country.

NJ has an inheritance tax rate up to 16%.

With high individual tax rates, disallowance of most losses*, high minimum tax on S-Corps, and the lowest estate exemption in the country, NJ is one of the worst tax states for traders.

13. Washington:

WA has a Business & Occupation Tax (B&O) assessed on gross receipts from business activities. See Business & Occupation tax. Tax rates vary by classification, with the highest rate 0.15% applying to a service business.

WA exempts a trading company from B&O tax, providing it does not have other types of income like management fees or profit allocation (carried interest) in a hedge fund.

WA does not have an individual income tax system.

WA has the highest estate tax rate (20%) in the country, and the estate exemption is 2.054M.

WA is a good tax state for traders to live in, but not a good place to pass away, if you exceed the estate exemption.

14. Massachusetts:

MA subjects S-Corps to a 0.26% Corporate Excise Tax (CET). It’s applied to MA tangible property or taxable net worth (TNW), which includes trading equity capital and undistributed trading income. The minimum CET is $456, which translates to $175,384 TNW. On $500,000 TNW, CET is $1,300. See MA Corporate Excise Tax.

S-Corps with high gross receipts, which includes net trading gains, may also be subject to an income tax measure of CET. “S-Corps with total receipts of $6 million or more are liable for the income measure of the corporate excise at the following rates: 1.83% on net income subject to tax if total receipts are $6 million or more, but less than $9 million; or 2.75% on net income subject to tax if total receipts are $9 million or more,” per MA tax site.

Most trading companies have trading gains under $6M, so they do not owe the income portion of CET. If you expect trading gains significantly over $6M, consider a dual entity structure: A trading general partnership, which is free of all CET, and an S-Corp management company paying the $456 minimum CET.

MA requires an LLC to file an annual report with a $500 fee. MA does not require an annual report from a general partnership.

MA has an individual income tax regime, with two flat tax rates for 2016. Per MA Personal Income Tax:

- 5.1% tax rate on earned income (salaries, wages, tips, commissions) and unearned income (interest, dividends, and certain capital gains);

- 5.1% tax rate on long-term capital gains (except collectibles);

- 12% tax rate on short-term capital gains, and Section 475 MTM ordinary income from trading gains earned by business traders who made a timely Section 475 election.

MA has an estate tax rate up to 16%. MA has an estate exemption of $1M, which is low among the fifteen states that have an estate tax regime.

Most MA residents pay individual income taxes at the 5.1% rate, which is competitive. But, traders owe the higher 12% rate on short-term capital gains and Section 475 ordinary income, which makes MA a bad tax state for traders.

Attend our Webinar or watch the recording afterward: Trader Tax Battle Of The States.


Trader Tax Battle Of The States: Midwest Vs. Southeast Top 10 States

| By: Robert A. Green, CPA

Click to read Green's blog post in Forbes.

Click to read Green’s blog post in Forbes.

Traders have unique tax issues on state and local income tax returns for business entities and individuals. Moreover, state and local tax regimes vary significantly. The preferred business entity for a trader is an S-Corp pass-through entity, which is free of entity-level federal taxation. Some states and cities subject S-Corps to taxation. (Read our recent blog post: A Few States Tax S-Corps: Traders Can Reduce It.)

In my five-part series “Trader Tax Battle Of The States,” I focus on state and local tax systems for S-Corps, LLCs, and partnerships. I mention basic information about individual income tax, estate and inheritance tax regimes. The numbers listed below are the states ranking by population.

5. Illinois:

IL has a 1.5% Replacement Tax (RT) on partnerships, trusts, and S corps. There is an exemption for an “investment partnership” per Illinois Income Tax Act (IITA) Section 1501(a)(11.5). An LLC filing a partnership return qualifies for this exemption, but an S-Corp does not.

The 1.5% RT rate is meaningful, so it is important for traders to reduce it. There are two ways: Trade a smaller amount of funds in an S-Corp, so you do not owe significant RT.

Alternatively, if you have a larger amount of capital and expect high income, use a dual entity structure: A trading general partnership, which is exempt from RT, and an S-Corp management company, with reduced RT. The partnership pays the S-Corp a monthly administration fee and profit allocation defined in the partnership agreement. The S-Corp lowers it’s net income and RT, by deducting officer compensation and employee benefit plans, including health insurance premiums and retirement plan contributions. Most trading income remains in the general partnership, free of RT.

IL has an individual income tax system with a 3.7% flat rate.

IL has an estate tax rate up to 16% and an exemption of 4M.

IL reminds me of New York City, with lots of traders working for banks and trading firms nearby commodity and futures exchanges. While most people do not think of IL as a low tax state, its 3.7% flat tax rate on individual income is competitive, and traders can reduce RT on S-Corps.

6. Pennsylvania:

The PA legislature repealed the Capital Stock Tax on LLCs and S-Corps and completed the phase-out by December 31, 2015.

PA has an individual income tax system with a 3.07% flat rate.

PA has an inheritance tax rate up to 15%, but no estate tax.

7. Ohio:

OH has a 0.26% Commercial Activity Tax (CAT) based on taxable gross receipts (TGR). TGR do not include interest (other than from installment sales), dividends, and capital gains. See the CAT table at Important Changes to the Commercial Activity Tax in 2014.

A trading company should owe the minimum CAT of $150 since TGR excludes trading gains.

OH has a progressive individual income tax system, and the top rate is 4.997% on income over $208,500.

OH has no estate or inheritance tax.

8. Georgia:

GA has a net worth (NW) tax on S-Corps. The tax table has many brackets, and here are some examples: $100 for NW less than $100,000, $250 for NW less than $500,000, and $500 for NW less than $1M. See Net Worth Tax Table (pages 8-10) in GA’s 2015 S-Corp Income Tax instructions.

NW includes equity and undistributed income, which means it includes trading capital and undistributed trading gains.

S-Corps and partnerships do not pay an income tax, except they must withhold personal income tax on amounts paid to nonresident shareholders and partners.

GA has a progressive individual income tax system, and the top rate is 6% on income over $10,000 (married filing joint).

GA does not have an estate or inheritance tax.

9. Michigan:

MI does not subject S-Corps and partnerships to Corporate Income Tax (CIT) unless it is a financial institution or insurance company.

MI has an individual income tax system with a 4.25% flat rate.

MI does not have an estate or inheritance tax.

10. North Carolina:

NC has a 0.15% Franchise Tax (FT) on S-Corps based on net worth (NW) or appraised value of NC tangible property. The minimum FT is $35. For example, FT is $150 on $100,000 NW. 2015 North Carolina S Corporation Tax Return Instructions on page 3.

Trading equity capital is part of NW, so if you have significant trading capital, consider a dual-entity trading structure: A trading partnership, which is free of FT, and an S-Corp management company with reduced FT, after paying officer compensation and employee benefit plans.

NC has an individual income tax system with a 5.75% flat rate.

NC does not have an estate or inheritance tax.

Attend our Webinar or watch the recording afterward: Trader Tax Battle Of The States.


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