GreenTraderTax & GreenTraderFunds - Message Board: Prop trading, K-1, expenses, taxes

Answer posted by a GTT competitor.

Xxxx of competitor
YYYYYY (competitor)
Registered: Oct 2003
Posts: 8
11-18-03 12:37 AM

I've noted some of the prior postings, and I want to chime in with my comments. I disagree with the answers that say the additional expenses not reflected on the K-1 should go onto the Schedule E. I think the additional expenses should go on a Schedule C.
My reasoning is that the Schedule E reflects figures that supposedly come off the K-1. Presumably the prior posters think the additional expenses would go into Part II "Income or Loss from Partnerships and S Corporations." But Block 27 says, "Caution: The IRS compares amounts reported on your tax return with amounts shown on Schedules(s) K-1." Nowhere in Part II [the remaining lines are 28-32] is there a line to enter expense items that were not reported on the K-1.

My point is that if the items on Schedule E had better tally with the numbers on the K-1, because if they don't, then the IRS may well trigger an audit to find out why the numbers are not the same.

Accordingly, it is my judgment that the proper place for the additional expenses to go is on Schedule C, not Schedule E.
__________________
xxxxx
YYYYYYY

Green reply: The above answer is clearly wrong. Unless you have a Schedule C business activity, you can’t use Schedule C. A proprietary trader member of a LLC filing a partnership tax return receives a Form K-1 that is reported on Schedule E. This prop trader does not have a Schedule C business activity; unless he or she has significant trading activity outside the prop trading firm in his or her own trading accounts.

IRS rules clearly state, and CPAs in the know clearly put non-reimbursed partnership or LLC expenses on Schedule E. In fact professional tax preparation software does the same. CPE classes for CPAs teach this practice.

I think the above answer clearly shows that the person answering questions on the Elite board for their new tax sponsor is clearly lacking in his knowledge of the tax code.

His faulty “reasoning” is unacceptable, as the law is clear and does not need speculation and reasoning here. His suggested treatment will also get a trader examined by the IRS in my opinion.

Remember the K-1 items are recorded on Schedule E to match what’s listed on Form K-1; so there will be no questions from the IRS. Only the additional non reimbursed expense amounts and home office expenses are reported on Schedule E underneath those K-1 numbers.

Perhaps this other firm doesn’t prepare tax returns for many prop traders. If they do, I feel sorry for the prop traders who get this bum advice. This leads to lost deductions and that costs you money.

Watch out, this same firm scares individuals into thinking they must have an entity to deduct their business expenses. That is bad advice and we wonder why they came to this conclusion? Are they suggesting that traders who don’t qualify for trader tax status use an entity to fool the IRS into granting them trader tax status? That won’t work, as trader tax status is still required on the entity-level; and its very risky. Are they just trying to push complex entity solutions that are profitable for them (set up and annual preparation costs)? Have many of their individual traders been examined by the IRS and have they lost many exams? You should ask them before you sign up with them.

If you don’t qualify for trader tax status, our firm does not recommend a Schedule C or an entity. You need to file as an investor. If you qualify for trader tax status, we recommend entities for traders who want a tax-deductible retirement plan contribution, health insurance premium deduction and/or late year MTM elections. Many traders simply don’t need the extra expense of entities. By the way entities by default owe the higher NASDAQ “professional” data feed fees. See http://www.greencompany.com/EducationCenter/GTTRecNasdaqDataFeedFees.shtml.

For good information on entities for traders see http://www.greencompany.com/Traders/TraderEntities.shtml

We also totally disagree with this Elite tax sponsor’s approach to trader entities. In the past, they have harped on the advantages of C-Corps and we think there are only disadvantages and pitfalls. See our entity forum on our board and also our new fringe benefit plan page at http://www.greencompany.com/EducationCenter/GTTRecFringeBenefitPlans.shtml

Feel free to always get a second opinion from our firm before you purchase one of our competitors (ill-conceived) entity schemes.

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Robert A. Green, CPA & CEO
GreenTraderTax.com

Edited by GreenGTTCPA (11/18/03 10:02 AM)

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