LLC taxed as S-corp for trading

Non-investing personal finance issues including insurance, credit, real estate, taxes, employment and legal issues such as trusts and wills
Post Reply
Topic Author
Nysoz
Posts: 18
Joined: Wed Feb 14, 2018 10:03 am

LLC taxed as S-corp for trading

Post by Nysoz »

Does anyone have any input or knowledge in forming an LLC taxed as an S-corp for trading? I'll hire a service to help form the LLC and my CPA will go through everything but I wanted to gather as much information together so I know what other questions to ask as well.

I've been selling options in the stock market for the past 2 years and have been pretty successful. I've reached my fatFIRE numbers and I enjoy doing this so I'll continue for the time being. As of now, all the options premium have been taxed at stcg rates. From what I've seen and heard, moving this into an LLC/S-corp may help going forward.

Tax benefits include qualifying for tax trader status or professional trader. This would allow me to deduct a home office and some associated expenses. This also allows me to potentially elect mark to market status if I chose to in the future as well.

Then if I elect to be taxed as an S-corp, I'm also allowed to deduct health insurance premiums as well as contribute to a solo 401K.

For example, if I move my personal assets of $5M into the LLC trading account and generate $500k a year in premium/income by selling options.

I have to pay myself a reasonable salary. An average money/hedge fund manager makes around $150k a year. I'll have to pay myself as a W2 employee and taxes associated with that. From what I understand the rest of the $350k can be also returned as a distribution. Distributions are tax free as long as I don't exceed the cost basis of the initial $5M. Once the cumulative distributions exceed the $5M cost basis, anything else is taxed at LTCG rates. Other things I've found is a generalized 60/40 rule where 60% should be W2 salary and the 40% can be considered a distribution which would bring these numbers to $300k W2/$200k distribution. Otherwise I can then return the distribution back into the LLC to raise my cost basis into the company as well.

I appreciate any constructive criticism!
Katietsu
Posts: 5348
Joined: Sun Sep 22, 2013 1:48 am

Re: LLC taxed as S-corp for trading

Post by Katietsu »

I have no comment on the plan, in general. I did notice that it looks like you did not add the self employment taxes that would result on the W-2 income.
Topic Author
Nysoz
Posts: 18
Joined: Wed Feb 14, 2018 10:03 am

Re: LLC taxed as S-corp for trading

Post by Nysoz »

Katietsu wrote: Sat Oct 09, 2021 2:57 pm I have no comment on the plan, in general. I did notice that it looks like you did not add the self employment taxes that would result on the W-2 income.
I just lumped the 15.3% self employment taxes as part of the 'taxes associated'. I should've clarified or been more clear. Thanks for pointing it out though.
pizzy
Posts: 311
Joined: Tue Jun 02, 2020 6:59 pm

Re: LLC taxed as S-corp for trading

Post by pizzy »

How did you do in the last bear market?
martint
Posts: 101
Joined: Fri Feb 19, 2016 11:31 am

Re: LLC taxed as S-corp for trading

Post by martint »

Nysoz wrote: Sat Oct 09, 2021 2:30 pm
Then if I elect to be taxed as an S-corp, I'm also allowed to deduct health insurance premiums as well as contribute to a solo 401K.
The S-corp includes the health insurance premiums on your W2 and you can personally deduct them if you’re eligible. You didn’t mention if you are married, but FYI if married and your spouse has access to an employer health plan, you are not eligible to deduct the premiums.
Rex66
Posts: 978
Joined: Tue Aug 04, 2020 5:13 pm

Re: LLC taxed as S-corp for trading

Post by Rex66 »

So you actually won’t have any clients but yourself?
Topic Author
Nysoz
Posts: 18
Joined: Wed Feb 14, 2018 10:03 am

Re: LLC taxed as S-corp for trading

Post by Nysoz »

pizzy wrote: Sat Oct 09, 2021 3:24 pm How did you do in the last bear market?
I mainly sell TSLA options and peak to trough this year in February/March was -36% and I did just fine.
Rex66 wrote: Sat Oct 09, 2021 3:37 pm So you actually won’t have any clients but yourself?
Yep, just managing my own portfolio.
martint wrote: Sat Oct 09, 2021 3:33 pm
The S-corp includes the health insurance premiums on your W2 and you can personally deduct them if you’re eligible. You didn’t mention if you are married, but FYI if married and your spouse has access to an employer health plan, you are not eligible to deduct the premiums.
I am married and my wife is in between jobs now. She still enjoys her job so once she finds a new job and qualifies for benefits, we'll switch to that plan as it's probably better than anything in the marketplace. In the meantime, it would be a nice perk to be able to deduct the premiums.
viruz
Posts: 3
Joined: Wed Sep 08, 2021 7:35 am

Re: LLC taxed as S-corp for trading

Post by viruz »

Been thinking of the same. Albeit not close to any amount as suggested by OP. Trying to follow this conv.

Alternate q for Op: seems you have been successful with just a single stock and options around it. If you dont mind sharing your experience- Do you just do standard options or even complex ones?
vm81
Posts: 82
Joined: Fri Jan 03, 2020 2:24 pm

Re: LLC taxed as S-corp for trading

Post by vm81 »

Distributions are NOT tax free. You just save on the self employment taxes. You still have to pay income taxes on your personal return.
Topic Author
Nysoz
Posts: 18
Joined: Wed Feb 14, 2018 10:03 am

Re: LLC taxed as S-corp for trading

Post by Nysoz »

viruz wrote: Sat Oct 09, 2021 5:19 pm Been thinking of the same. Albeit not close to any amount as suggested by OP. Trying to follow this conv.

Alternate q for Op: seems you have been successful with just a single stock and options around it. If you dont mind sharing your experience- Do you just do standard options or even complex ones?
I mainly aim to profit from theta. Iron condors, short strangles, some diagonal spreads/poor man covered calls. I mainly use TSLA but also run covered strangles on QQQ. Lately I have been trying condors on other tickers such as GOOGL, NVDA, COIN, AMZN.
vm81 wrote: Sat Oct 09, 2021 5:28 pm Distributions are NOT tax free. You just save on the self employment taxes. You still have to pay income taxes on your personal return.
I've read both ways online. I will definitely clarify with my CPA.

https://loopholelewy.com/loopholelewy/0 ... tal%20gain.

On the other hand, with certain exceptions, S corporations generally do not make dividend distributions. S corporations generally make non-dividend distributions, which are tax-free, provided the distribution does not exceed the shareholder's stock basis. If the distribution exceeds the shareholder's stock basis, the excess amount is taxable as a long-term capital gain.

S corporation distributions are not subject to FICA taxes (social security and Medicare taxes).

https://www.irs.gov/businesses/small-bu ... debt-basis

The S corporation makes a non-dividend distribution to the shareholder.
In order for the shareholder to determine whether the distribution is non-taxable they need to demonstrate they have adequate stock basis.

A non-dividend distribution in excess of stock basis is taxed as a capital gain on the shareholder's personal return. It is a long-term capital gain (LTCG) if the S corporation stock has been held for longer than one year.
MrJedi
Posts: 1259
Joined: Wed May 06, 2020 11:42 am

Re: LLC taxed as S-corp for trading

Post by MrJedi »

You definitely need to understand how S Corp taxation and basis works.

Any income will flow down into your personal return.

If you are saying you get a tax free distribution due to your basis, that is just a return of the taxed money you already contributed.
vm81
Posts: 82
Joined: Fri Jan 03, 2020 2:24 pm

Re: LLC taxed as S-corp for trading

Post by vm81 »

MrJedi wrote: Sat Oct 09, 2021 7:45 pm You definitely need to understand how S Corp taxation and basis works.

Any income will flow down into your personal return.

If you are saying you get a tax free distribution due to your basis, that is just a return of the taxed money you already contributed.
Exactly.

I just mistyped above. I said self employment taxes instead of payroll/FICA taxes.

I definitely think OP needs to give this more thought.
hachiko
Posts: 335
Joined: Fri Mar 17, 2017 1:56 pm

Re: LLC taxed as S-corp for trading

Post by hachiko »

Have to step back a bit. First, operating through an LLC has no effect on whether you can meet the requirements to be considered a trader. Same with choosing S-Corp. C-Corp - maybe that could help with one of the prongs of the test, but it's still untested as far as I know.

Second, what benefit are you trying to get here? How much are your expenses? You'll probably pay an extra 20% in taxes on your salary portion in tax and compliance costs.

So in your scenario, that's an *extra* 30k in tax and other employment related costs. Do you really have 80k+ in expenses from this activity to offset that cost?

Also, maybe your trading strategy allows you to meet the requirements to be considered a trader trading on just one company's securities, but I'm pretty skeptical that you can.
Topic Author
Nysoz
Posts: 18
Joined: Wed Feb 14, 2018 10:03 am

Re: LLC taxed as S-corp for trading

Post by Nysoz »

MrJedi wrote: Sat Oct 09, 2021 7:45 pm You definitely need to understand how S Corp taxation and basis works.

Any income will flow down into your personal return.

If you are saying you get a tax free distribution due to your basis, that is just a return of the taxed money you already contributed.
I see where I got confused by trying to look at trading and non-trading S corps. So that brings it back to the main benefit of an S corp is the ability to deduct health insurance premiums and creating income to qualify for retirement plans.
hachiko wrote: Sat Oct 09, 2021 8:57 pm Have to step back a bit. First, operating through an LLC has no effect on whether you can meet the requirements to be considered a trader. Same with choosing S-Corp. C-Corp - maybe that could help with one of the prongs of the test, but it's still untested as far as I know.

Second, what benefit are you trying to get here? How much are your expenses? You'll probably pay an extra 20% in taxes on your salary portion in tax and compliance costs.

So in your scenario, that's an *extra* 30k in tax and other employment related costs. Do you really have 80k+ in expenses from this activity to offset that cost?

Also, maybe your trading strategy allows you to meet the requirements to be considered a trader trading on just one company's securities, but I'm pretty skeptical that you can.
From what I read, an entity needs to essentially pass the sniff test to qualify for TTS. The prevailing numbers I've seen are 15 trades a week, 60 a month, 720 a year. Spending 4 hours a day (which includes research), 4 days a week. Average holding period less than 31 days. Then you also have to have intentions to run a business and make a living by trading.

You can qualify for TTS without the S-corp but electing to be taxed as one possibly makes the trading activity more legitimate in the eyes of the IRS as no one goes through the process of forming an LLC/S-corp without the intention to run it as a business.

So taking away all of the distribution shenanigans I misunderstood, the main benefit of the S-corp is possibly looking more legitimate to the IRS, deductions of health insurance premiums, 401k contributions. Home office and other trading deductions can be obtained by meeting TTS.

The max 401k contribution is $58k. If my wife chooses to not return to work, another $12k available for the bdRoth IRA as we wouldn't have another source of earned income. Health insurance premiums are around $1k a month so that would be another possible $12k if applicable. The question then becomes is that worth forming the S-corp and paying the payroll taxes on the reasonable income I pay myself. I've toyed around with the idea of forming a partnership or adding my wife to the payroll as well. She could help with the research and business activities which would unlock another potential 401k to max out, but I've held off on this part for now.

Otherwise if nothing else changes, I'll just continue to do this and be taxed at stcg rates.

I'm pretty sure I qualify with the quantity of trades/activity, but ultimately I can also change my trading slightly to ensure meet the requirements. An iron condor is 1 complex trade consisting of 4 separate options. So if I open 10 iron condors (40 separate options) at once, that's one trade. I can easily just leg into the position by opening them grouped differently to meet the requirements. I could also just close the position in multiple trades instead of letting them expire worthless as well.
J295
Posts: 3070
Joined: Sun Jan 01, 2012 11:40 pm

Re: LLC taxed as S-corp for trading

Post by J295 »

1. You don’t need an entity to qualify for the self-employed health insurance deduction.

2. Pass-through income in an S Corp whether distributed or not, is taxable.

3. For 2021 the self-employment tax to be paid on income above $142,800 is 2.9%. The self-employment tax up to that amount is 15.3%.
bsteiner
Posts: 6213
Joined: Sat Oct 20, 2012 9:39 pm
Location: NYC/NJ/FL

Re: LLC taxed as S-corp for trading

Post by bsteiner »

How is this expected to make money? Aren’t options a zero sum game less the transaction costs?
illumination
Posts: 1743
Joined: Tue Apr 02, 2019 6:13 pm

Re: LLC taxed as S-corp for trading

Post by illumination »

Nysoz wrote: Sun Oct 10, 2021 5:36 am So that brings it back to the main benefit of an S corp is the ability to deduct health insurance premiums and creating income to qualify for retirement plans.

You don't need to be an S-Corp to qualify for retirement plans, you can have a Solo 401k and an LLC.
Topic Author
Nysoz
Posts: 18
Joined: Wed Feb 14, 2018 10:03 am

Re: LLC taxed as S-corp for trading

Post by Nysoz »

J295 wrote: Sun Oct 10, 2021 8:06 am 1. You don’t need an entity to qualify for the self-employed health insurance deduction.

2. Pass-through income in an S Corp whether distributed or not, is taxable.

3. For 2021 the self-employment tax to be paid on income above $142,800 is 2.9%. The self-employment tax up to that amount is 15.3%.
I think the problem is that trading typically creates capital gains instead of earned income. So I would need to pay myself a salary to create the earned income to be able to deduct health insurance premiums and contribute to retirement accounts.

Yeah, I realize that mistake by trying to look into it too hard. The question I have now is that it's all taxable, but how is it taxed? The reasonable salary I'd pay myself as a W2 would be the earned income or SEI. How is the rest taxed/categorized as? More than likely stcg or is that SEI as well?

So if I paid myself $150k as a reasonable salary, I'd have to pay the SE tax on that portion for sure. 15.3% of that up to $142800 is $21848 and the rest is about another $200 or a total of $22k. Some portion of this is deductible as well isn't it?

Another interesting possibility that comes up occasionally is how QBI tax deduction comes into play.
pizzy
Posts: 311
Joined: Tue Jun 02, 2020 6:59 pm

Re: LLC taxed as S-corp for trading

Post by pizzy »

Nysoz wrote: Sun Oct 10, 2021 9:52 am
J295 wrote: Sun Oct 10, 2021 8:06 am 1. You don’t need an entity to qualify for the self-employed health insurance deduction.

2. Pass-through income in an S Corp whether distributed or not, is taxable.

3. For 2021 the self-employment tax to be paid on income above $142,800 is 2.9%. The self-employment tax up to that amount is 15.3%.
I think the problem is that trading typically creates capital gains instead of earned income. So I would need to pay myself a salary to create the earned income to be able to deduct health insurance premiums and contribute to retirement accounts.

Yeah, I realize that mistake by trying to look into it too hard. The question I have now is that it's all taxable, but how is it taxed? The reasonable salary I'd pay myself as a W2 would be the earned income or SEI. How is the rest taxed/categorized as? More than likely stcg or is that SEI as well?

So if I paid myself $150k as a reasonable salary, I'd have to pay the SE tax on that portion for sure. 15.3% of that up to $142800 is $21848 and the rest is about another $200 or a total of $22k. Some portion of this is deductible as well isn't it?

Another interesting possibility that comes up occasionally is how QBI tax deduction comes into play.
https://proconnect.intuit.com/tax-refor ... alculator/

Use this to compare how a schedule c (sole prop) compares to an s-corp with a specified salary. You can ignore the other columns.
User avatar
MP123
Posts: 2331
Joined: Thu Feb 16, 2017 3:32 pm

Re: LLC taxed as S-corp for trading

Post by MP123 »

Nysoz wrote: Sun Oct 10, 2021 9:52 am Another interesting possibility that comes up occasionally is how QBI tax deduction comes into play.
It sounds like your income ($500k?) would be too high to qualify for the Sec 199a QBI deduction for a specified service business.
Nysoz wrote: Sun Oct 10, 2021 9:52 am I think the problem is that trading typically creates capital gains instead of earned income. So I would need to pay myself a salary to create the earned income to be able to deduct health insurance premiums and contribute to retirement accounts.
Yes, but long term capital gains are taxed preferentially compared to ordinary income and short term gains, so you wouldn't want to convert LTCG to ordinary income.
vm81
Posts: 82
Joined: Fri Jan 03, 2020 2:24 pm

Re: LLC taxed as S-corp for trading

Post by vm81 »

Nysoz wrote: Sun Oct 10, 2021 9:52 am
J295 wrote: Sun Oct 10, 2021 8:06 am 1. You don’t need an entity to qualify for the self-employed health insurance deduction.

2. Pass-through income in an S Corp whether distributed or not, is taxable.

3. For 2021 the self-employment tax to be paid on income above $142,800 is 2.9%. The self-employment tax up to that amount is 15.3%.
I think the problem is that trading typically creates capital gains instead of earned income. So I would need to pay myself a salary to create the earned income to be able to deduct health insurance premiums and contribute to retirement accounts.

Yeah, I realize that mistake by trying to look into it too hard. The question I have now is that it's all taxable, but how is it taxed? The reasonable salary I'd pay myself as a W2 would be the earned income or SEI. How is the rest taxed/categorized as? More than likely stcg or is that SEI as well?

So if I paid myself $150k as a reasonable salary, I'd have to pay the SE tax on that portion for sure. 15.3% of that up to $142800 is $21848 and the rest is about another $200 or a total of $22k. Some portion of this is deductible as well isn't it?

Another interesting possibility that comes up occasionally is how QBI tax deduction comes into play.
Yes you got that right. You need scorp to pay salary and deduct health insurance and retirement.

Your remainder after salary gets taxed as capital gains - long term or short term depending on your holding period. If you are going after trader status - stay away from any long term position. So in your case it will all be stcg.

QBI is only possible in case you elect mark to market - not an option if you dont elect that. You still have to account for all the limits, etc to determine if you can take any deductions.
User avatar
The Man with the Axe
Posts: 52
Joined: Sat Dec 21, 2019 2:05 pm

Re: LLC taxed as S-corp for trading

Post by The Man with the Axe »

These guys wrote the book on this subject:

https://greentradertax.com/
Invictus002
Posts: 100
Joined: Fri Feb 15, 2019 12:49 pm

Re: LLC taxed as S-corp for trading

Post by Invictus002 »

Following
Last edited by Invictus002 on Sun Oct 10, 2021 6:06 pm, edited 1 time in total.
Topic Author
Nysoz
Posts: 18
Joined: Wed Feb 14, 2018 10:03 am

Re: LLC taxed as S-corp for trading

Post by Nysoz »

MP123 wrote: Sun Oct 10, 2021 10:41 am It sounds like your income ($500k?) would be too high to qualify for the Sec 199a QBI deduction for a specified service business.

Yes, but long term capital gains are taxed preferentially compared to ordinary income and short term gains, so you wouldn't want to convert LTCG to ordinary income.
Yeah, but for years I don't make above the cap, QBI could come into play if I elected MTM.

Selling options is all taxed at stcg rates. A gray area here is if you sell a leap option > 1 year, some people argue that can be taxed as ltcg vs stcg.
vm81 wrote: Sun Oct 10, 2021 11:50 am
Yes you got that right. You need scorp to pay salary and deduct health insurance and retirement.

Your remainder after salary gets taxed as capital gains - long term or short term depending on your holding period. If you are going after trader status - stay away from any long term position. So in your case it will all be stcg.

QBI is only possible in case you elect mark to market - not an option if you dont elect that. You still have to account for all the limits, etc to determine if you can take any deductions.
So in my S corp example, $150k w2 salary, $350k stcg as distribution. I would pay $22k in SE tax on the w2 salary. Then I would able to deduct $58k for a 401k, say $12k in trading/home office expenses, $11k of the employer portion of the SE tax which is $81k. Using the top tax bracket of 37% (in case I make more than that), that's $30k in tax savings. But I did have to pay $22k in SE tax so that's $8k savings overall? Another $12k potential deductions for health insurance premiums or $4400 more potentially there.

I could potentially try and pay myself a lower salary which would decrease the SE tax burden and increase potential savings. But the lower the salary, but greater the scrutiny probably. It comes down to what's a reasonable salary to pay someone for what I'm paying myself. Can one argue that an average active fund charges 1% AUM so with a $5M account that's $50k?

If I just qualified for TTS as an LLC and skipped the S-corp, I'd be able to deduct $12k expenses, that's $4400 in savings.

I'm weary of electing MTM as from what I understand you basically have to pretend you bought everything at the start of the year and sell everything at the end of the year, realized or not, and get taxed. Then it goes into how investments don't count but trades do. MTM really helps if you have a big loss for the year or deal with potential wash sales, but stonks only go up.... right :beer ?

If these numbers are right, all this hassle may not be worth the potential tax savings. Once again I'll ask what my local CPA thinks and if needed contact one of the more known ones for traders.
The Man with the Axe wrote: Sun Oct 10, 2021 1:27 pm These guys wrote the book on this subject:

https://greentradertax.com/
Yeah, these guys are what started me thinking about doing this.
Topic Author
Nysoz
Posts: 18
Joined: Wed Feb 14, 2018 10:03 am

Re: LLC taxed as S-corp for trading

Post by Nysoz »

Invictus002 wrote: Sun Oct 10, 2021 1:46 pm I am in a similar situation, last couple of years, have been making $200k in profits from trading.

Me and my spouse also have a W2 earnings, so I am not sure if LLC and S Corp will be beneficial.

We earn about $200k on W2 and $200k on trading.

I make well over 5k trades and spend 5+ hours everyday trading consistently in a year.

Will we get any tax savings or other benefits setting up LLC with S Corp? Most of my trading qualifies for 1256 status, 60/40 LTGC/STGC if that is useful info.
From the information I've gathered into looking into it myself, the S corp shouldn't help you as you probably already have health insurance and the ability to contribute to retirement accounts.

Tax trader status +/- LLC may help with additional deductions like home office space, internet, phones, desks, monitors, subscriptions and such if not already deductions.

I obviously defer to anyone else with more experience or your CPA.
Topic Author
Nysoz
Posts: 18
Joined: Wed Feb 14, 2018 10:03 am

Re: LLC taxed as S-corp for trading

Post by Nysoz »

bsteiner wrote: Sun Oct 10, 2021 9:18 am How is this expected to make money? Aren’t options a zero sum game less the transaction costs?
Here's a random google'd webpage that explains how it doesn't have to be quite a zero sum game.

https://tickertape.tdameritrade.com/tra ... myth-15226

Selling options, and the way I do it, looks to profit from theta decay or the passage of time. So the easiest way I describe it to people is that I sell time or insurance in the stock market.

But that's a whole other topic and conversation lol.
vm81
Posts: 82
Joined: Fri Jan 03, 2020 2:24 pm

Re: LLC taxed as S-corp for trading

Post by vm81 »

Nysoz wrote: Sun Oct 10, 2021 2:27 pm
MP123 wrote: Sun Oct 10, 2021 10:41 am It sounds like your income ($500k?) would be too high to qualify for the Sec 199a QBI deduction for a specified service business.

Yes, but long term capital gains are taxed preferentially compared to ordinary income and short term gains, so you wouldn't want to convert LTCG to ordinary income.
Yeah, but for years I don't make above the cap, QBI could come into play if I elected MTM.

Selling options is all taxed at stcg rates. A gray area here is if you sell a leap option > 1 year, some people argue that can be taxed as ltcg vs stcg.
vm81 wrote: Sun Oct 10, 2021 11:50 am
Yes you got that right. You need scorp to pay salary and deduct health insurance and retirement.

Your remainder after salary gets taxed as capital gains - long term or short term depending on your holding period. If you are going after trader status - stay away from any long term position. So in your case it will all be stcg.

QBI is only possible in case you elect mark to market - not an option if you dont elect that. You still have to account for all the limits, etc to determine if you can take any deductions.
So in my S corp example, $150k w2 salary, $350k stcg as distribution. I would pay $22k in SE tax on the w2 salary. Then I would able to deduct $58k for a 401k, say $12k in trading/home office expenses, $11k of the employer portion of the SE tax which is $81k. Using the top tax bracket of 37% (in case I make more than that), that's $30k in tax savings. But I did have to pay $22k in SE tax so that's $8k savings overall? Another $12k potential deductions for health insurance premiums or $4400 more potentially there.

I could potentially try and pay myself a lower salary which would decrease the SE tax burden and increase potential savings. But the lower the salary, but greater the scrutiny probably. It comes down to what's a reasonable salary to pay someone for what I'm paying myself. Can one argue that an average active fund charges 1% AUM so with a $5M account that's $50k?

If I just qualified for TTS as an LLC and skipped the S-corp, I'd be able to deduct $12k expenses, that's $4400 in savings.

I'm weary of electing MTM as from what I understand you basically have to pretend you bought everything at the start of the year and sell everything at the end of the year, realized or not, and get taxed. Then it goes into how investments don't count but trades do. MTM really helps if you have a big loss for the year or deal with potential wash sales, but stonks only go up.... right :beer ?

If these numbers are right, all this hassle may not be worth the potential tax savings. Once again I'll ask what my local CPA thinks and if needed contact one of the more known ones for traders.
The Man with the Axe wrote: Sun Oct 10, 2021 1:27 pm These guys wrote the book on this subject:

https://greentradertax.com/
Yeah, these guys are what started me thinking about doing this.
Ok so you get the jist of it now. I am not going to comment on which deduction and how much is kosher - thats your call. Also if no M2M then QBI is out.

You have to also factor in cost of paytoll, cpa doing business tax returns for federal and state and the cost and hassle of making sure you are in compliance with all the registrstions. If couple of 1000 bucks is worth the hassle and potential IRS scrutiny - then go for it but thats your call.
SuzBanyan
Posts: 766
Joined: Thu Jun 02, 2016 11:20 am

Re: LLC taxed as S-corp for trading

Post by SuzBanyan »

With a Solo 401k, you will only be able to deduct about 25% of your salary (plus $19.5k if you are not contributing to another employer plan). The balance up to 58k can be contributed after-tax using a mega back door Roth, but there is no tax deduction.

Corrected thanks to nolesrule!
Last edited by SuzBanyan on Sun Oct 10, 2021 9:30 pm, edited 2 times in total.
nolesrule
Posts: 2103
Joined: Thu Feb 26, 2015 10:59 am

Re: LLC taxed as S-corp for trading

Post by nolesrule »

SuzBanyan wrote: Sun Oct 10, 2021 6:45 pm With a Solo 401k, you will only be able to deduct about 20% of your salary (plus $19.5k if you are not contributing to another employer plan). The balance up to 58k can be contributed after-tax using a mega back door Roth, but there is no tax deduction.
For an S-Corp drawing a W-2 salary, the employer contribution is up to 25% of compensation, which is the W-2 salary.

20% is for Schedule C filers, because the employer match can't come from compensation, so the compensation amount + employer match is equal to the profit from self employment - 1/2 SE taxes. So the math there is 25% employer match /(100% compensation +25% employer match) = 25%/125% = 20%
hachiko
Posts: 335
Joined: Fri Mar 17, 2017 1:56 pm

Re: LLC taxed as S-corp for trading

Post by hachiko »

Courts have set forth factors to be considered. None of those are whether an entity is involved. You're also missing some of the factors that courts consider.

Why do you think operating through an LLC, whether or not S treatment is elected, has any bearing on the ability to qualify for trader status? Forming an LLC and electing S treatment is, quite frankly, very easy to do and is not going to sway an agent. I still don't see the S Corp tax advantage (and you are improperly comparing costs and benefits). And on top of that, you are materially and unnecessarily increasing the stakes of an audit. Just think about if you do all this with the S-Corp and you lose on audit. You'll lose the expense deductions (which you'd lose anyway), but now you may also have to unwind all of your retirement contributions. And if your salary is not eligible for a deduction for the S Corp because you don't qualify as a trader, can you even reduce your personal income by that 150k on audit? If not, which I suspect is the case, you'd effectively be double taxed on that amount.
Topic Author
Nysoz
Posts: 18
Joined: Wed Feb 14, 2018 10:03 am

Re: LLC taxed as S-corp for trading

Post by Nysoz »

hachiko wrote: Sun Oct 10, 2021 8:21 pm Courts have set forth factors to be considered. None of those are whether an entity is involved. You're also missing some of the factors that courts consider.

Why do you think operating through an LLC, whether or not S treatment is elected, has any bearing on the ability to qualify for trader status? Forming an LLC and electing S treatment is, quite frankly, very easy to do and is not going to sway an agent. I still don't see the S Corp tax advantage (and you are improperly comparing costs and benefits). And on top of that, you are materially and unnecessarily increasing the stakes of an audit. Just think about if you do all this with the S-Corp and you lose on audit. You'll lose the expense deductions (which you'd lose anyway), but now you may also have to unwind all of your retirement contributions. And if your salary is not eligible for a deduction for the S Corp because you don't qualify as a trader, can you even reduce your personal income by that 150k on audit? If not, which I suspect is the case, you'd effectively be double taxed on that amount.
I'm pretty sure I qualify for TTS based on the number of trades I make. Forming an LLC/S-corp would just be icing on the cake or cherry on top if you will.

If I'm improperly comparing costs and benefits, can you explain why for education? There's quite a few traders that do this legitimately and I'm sure they wouldn't be doing it if it weren't a benefit or that much increased risk of audit. I'm still in the information gathering phase before I finalize plans with my CPA so I appreciate all information.
vm81 wrote: Sun Oct 10, 2021 4:37 pm Ok so you get the jist of it now. I am not going to comment on which deduction and how much is kosher - thats your call. Also if no M2M then QBI is out.

You have to also factor in cost of paytoll, cpa doing business tax returns for federal and state and the cost and hassle of making sure you are in compliance with all the registrstions. If couple of 1000 bucks is worth the hassle and potential IRS scrutiny - then go for it but thats your call.
Yeah even though the S-corp saves some money on taxes I'm not sure the few thousand is worth that hassle. I came across someone on reddit saying that if I'm making over $1M doing this, a C-corp may make sense. I haven't looked much into that as I heard C-corp was bad due to double taxation. I am in a state that has <5% corporate tax rates if that matters much.

Ultimately I'll probably just end up paying the taxes unless my CPA makes things terribly straightforward.
MrJedi
Posts: 1259
Joined: Wed May 06, 2020 11:42 am

Re: LLC taxed as S-corp for trading

Post by MrJedi »

A few years ago C corps got a tax cut that can make them more favorable even accounting for the double tax (corporate tax + individual dividend tax).

If you do not need immediately the income each year, C corps have the flexibility of retaining earnings within the business without distribution or income pass through. This can help with tax drag as you will only pay the lower corporate tax each year and then only pay the individual dividend tax when you do pay out a dividend. You do need a plan for the retained earnings though (reinvestment, saving for large capital expense, etc) otherwise you can be taxed on that. With an S Corp you will get hit by individual ordinary income every year. So it is possible for the C corp to be better if you are in high individual tax bracket. If you are in lower individual tax bracket, that would be a point for S Corp.

The decision between S vs. C is quite nuanced and probably not as simple as you are thinking. Sounds like you have a CPA, they would be a good person to talk about this.
Topic Author
Nysoz
Posts: 18
Joined: Wed Feb 14, 2018 10:03 am

Re: LLC taxed as S-corp for trading

Post by Nysoz »

MrJedi wrote: Wed Oct 13, 2021 9:16 am A few years ago C corps got a tax cut that can make them more favorable even accounting for the double tax (corporate tax + individual dividend tax).

If you do not need immediately the income each year, C corps have the flexibility of retaining earnings within the business without distribution or income pass through. This can help with tax drag as you will only pay the lower corporate tax each year and then only pay the individual dividend tax when you do pay out a dividend. You do need a plan for the retained earnings though (reinvestment, saving for large capital expense, etc) otherwise you can be taxed on that. With an S Corp you will get hit by individual ordinary income every year. So it is possible for the C corp to be better if you are in high individual tax bracket. If you are in lower individual tax bracket, that would be a point for S Corp.

The decision between S vs. C is quite nuanced and probably not as simple as you are thinking. Sounds like you have a CPA, they would be a good person to talk about this.
Thanks for that explanation. Yeah I like researching and getting as much information as possible before any meetings. This way I know what important questions to ask. I also think it's important to realize that all CPAs aren't the same or have the expertise in all areas of tax law so I want to be able to ask the important questions to realize if my CPA knows about this rather specific area.

I also learn by examples so bear with my very rough numbers/estimates.

So say I start my trading company LLC taxed as a C-corp with $5M. I make $1M in trading gains. I pay myself a reasonable salary of $150k. The company has another $100k in expenses for 401k match and such. That leaves $750k left for the company profit that's taxed at 21% plus any state corporation tax.

The question becomes what to do with this $750k. Tax on retained earnings can be 20% above $250k if there's no approved explanation of why this profit is retained and not paid out. So I'd either have to pay myself $500k in dividends and retain $250k OR explain/argue that I'm using that $750k to reinvest into the business/use as capital to produce even more income going forward.

On a personal level, I'd pay income taxes on my $150k salary and dividend taxes on any dividends I pay out (where the double taxation occurs).

I'd have to then essentially calculate effective tax rate (of having the $1M flow through as stcg) to see how it compares to the corporate tax rate to see if it's worth it. Then also figure out what to do once I'm done trading the tax consequences of closing the company. Is that a reasonable ELI5 version or am I missing something else?
Post Reply