Business Expense Treatment
If you qualify for trader tax status, you can use the more favorable business expense treatment.
Business traders can deduct all reasonable business expenses, whether they have trading gains or losses, saving around $5,000 per year on average. Business-expense deductions hinge on qualifying for trader tax status (TTS), of course. Investors, on the other hand, are very limited. Investment managers have business expense treatment, too.
The good news is you can still claim TTS for 2015, and even other open tax years (usually up to three years prior). Unlike Section 475 MTM (mark-to-market) accounting, which must be elected by the April 15 deadline, TTS can simply be claimed by a taxpayer after the fact, based on facts and circumstances. If you’re just learning about TTS, you might still be in luck for 2015.
Investors vs. business traders
Unlike business traders, investors are stuck with restricted itemized deductions. Investors can’t deduct pre-business education including most seminars and travel costs, home-office expenses, and start-up costs.
Investment expenses are only allowed as part of “miscellaneous itemized deductions” in excess of 2% of adjusted gross income (AGI), and they aren’t deducted against 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. When you have negative taxable income, investment expenses are wasted, as they don’t carry over to subsequent tax years. Bottom line: Many investment expenses wind up on the cutting room floor.
Business deductions include:
- Section 179 (100%), bonus, and or regular depreciation on computers, equipment, furniture and fixtures.
- Amortization on start-up costs (Section 195), organization costs (Section 248) and software.
- Expensing of fixed assets up to $2,500 per item.
- Education expenses paid and courses taken after commencement of your trading business activity. Otherwise, pre-business education may not be deductible, or it may be included in Section 195 startup costs.
- Books/publications, market data, online and professional services, chat rooms, mentors, coaches, supplies, phone, travel/entertainment, seminars, conferences, assistants, consultants and more.
- Home-office expenses for the business portion of your home (share of rent, mortgage interest, real estate tax, depreciation on home, utilities, repairs, insurance and all other home costs).
For more in-depth information about business expenses for traders, including special rules for education expenses, startup expenses, home office and other expenses, read Green’s 2016 Trader Tax Guide.