Anyone Incorporate their trading / investment account?

[green night]

from a tax standpoint and possibly a liability point?

It seems like it would take most of the judgment out of the question ...

Here's an Investopedia article. Thanks in advance!

Benefits Abound For Active Traders Who Incorporate | Investopedia

 

[COcheesehead]

I doubt many, if any, on here would fit the IRS requirement.
How the IRS Defines a Trader
In IRS Publication 550 and Revenue Procedure 99-17, the IRS has set out general guidelines that provide guidance as to the activities that qualify trading as a business. To be engaged in a business as a trader in securities, a person must trade on a full-time basis, and derive most of his or her income through day trading. According to the IRS, a trader is someone who trades significantly and continuously in order to profit from the short-term fluctuations in security prices.

 

[GrayHare]

The trader definition applies only to individuals. Corporations do not have to meet those requirements. If the corporate tax rate drops, this may become a more attractive option.

 

[green night]

The trader definition applies only to individuals. Corporations do not have to meet those requirements. If the corporate tax rate drops, this may become a more attractive option.

The article doesn't read quite that clean but it definitely agrees that if you incorporate you have more flexibility. I'm worried that I'll be in that middle ground (lots of trading but a few long term holdings) and find myself having to get an attorney etc.

It seems like the safest way is to incorporate it. Also will come in handy if if I have some consulting/1099 income.

 

[Totoro]

Different tax system here (Europe), but I will likely incorporate in two years and transfer my fixed income holdings there.

It's a tax optimization thing: I'll pay 1.2% of unincorporated assets regardless of returns, and 25% on gains of incorporated assets (minus expenses). For low yielding assets incorporating works in my favor.

Not to mention I already have a corporation setup from which I do my side activities, so admin wise it doesn't cost me much more.

 

[harley]

I have migrated the trading part of my portfolio to my Roth IRA. That removes any concerns about taxes from the process. It's a much more comfortable was for me to, as Uncle Mick says, burn off excess testosterone. Particularly nice is not having to worry about short term vs. long term capital gains.

 

[COcheesehead]

My wife "Inc'd" her business. In the end there are benefits tax wise and 401k wise, but also more paperwork, she had to hire an accountant, more red tape. So keep that in mind too.

 

[Texas Proud]

1st, sounds like it is a job to me to be a trader....

2nd, I do not believe in trading as investing... I am interested in investing, not trading...

3rd, how much money are you really talking about The benefits they say do not make much difference unless you have some real money in the game... I could care less that there is a $3K loss limit... and as mentioned a few posts up I do my 'trading' in an IRA so no taxes anyhow.... I just accept my losses as a loss and my gains as a gain...


4th, I do not want to file another tax return and deal with the other requirements for a corporation....


And last.... what IS the question you want to take the judgement out of

 

[green night]

1st, sounds like it is a job to me to be a trader....

2nd, I do not believe in trading as investing... I am interested in investing, not trading...

3rd, how much money are you really talking about The benefits they say do not make much difference unless you have some real money in the game... I could care less that there is a $3K loss limit... and as mentioned a few posts up I do my 'trading' in an IRA so no taxes anyhow.... I just accept my losses as a loss and my gains as a gain...


4th, I do not want to file another tax return and deal with the other requirements for a corporation....


And last.... what IS the question you want to take the judgement out of

The IRS has strict Guidelines to be categorized as a trader. It seems from what I read you can't be a trader and investor (long term holder) in same account.

Traders have many more tax advantages. Inc seemingly gets around all that and you add flexibility but with all the paperwork etc.

 

[green night]

1st, sounds like it is a job to me to be a trader....

2nd, I do not believe in trading as investing... I am interested in investing, not trading...

3rd, how much money are you really talking about The benefits they say do not make much difference unless you have some real money in the game... I could care less that there is a $3K loss limit... and as mentioned a few posts up I do my 'trading' in an IRA so no taxes anyhow.... I just accept my losses as a loss and my gains as a gain...


4th, I do not want to file another tax return and deal with the other requirements for a corporation....


And last.... what IS the question you want to take the judgement out of

I'm talking about a $1.2MM. So, let say I make 100k, I would like to shield some of that for a couple computers, 401k, etc.

 

[pb4uski]

It sounds like the benefit of incorporating is only if you are a poor trader... you can deduct losses in excess of the $3,000/year..... I actually have had few losses so I don't see any benefit... also, if I'm successful I would prefer to pay 15% capital gains rate or even 15%/25% ordinary tax rate to 35% corporate tax rate. Not a good idea for most people.

 

[Texas Proud]

It sounds like the benefit of incorporating is only if you are a poor trader... you can deduct losses in excess of the $3,000/year..... I actually have had few losses so I don't see any benefit... also, if I'm successful I would prefer to pay 15% capital gains rate or even 15%/25% ordinary tax rate to 35% corporate tax rate. Not a good idea for most people.

To add to this... that is NET... so you can deduct as many losses as you have as long as you have more gains...


But, it is not 15% gain as he is going to be trading... not investing... all should (will) be ST gains/losses.....

 

[Texas Proud]

I'm talking about a $1.2MM. So, let say I make 100k, I would like to shield some of that for a couple computers, 401k, etc.

Have you been doing this already From what I read most people doing trading do not make money....


But I will say that, yea, you are talking about some money where it might make sense... me, I would just invest it and say make $80K or so and only pay taxes on my realized gains (which might be 0 tax).... OR, invest in preferred shares and get divis in the same $80K range...

Which means.... I do not have to work!!!



BTW, are you going to day trade or what? IOW, how many trades are you planning on doing?

 

[GrayHare]

One major benefit: individuals are taxed on income, whereas corporations are taxed on profit (income minus expenses). Under a corporate structure one can deduct many costs that an individual cannot. Another benefit that article discusses is shielding one's assets from personal liability.

 

[Texas Proud]

One major benefit: individuals are taxed on income, whereas corporations are taxed on profit (income minus expenses). Under a corporate structure one can deduct many costs that an individual cannot. Another benefit that article discusses is shielding one's assets from personal liability.

But that is some BS IMO.... what expenses are you going to deduct For an individual I cannot see a big list of deductions that are sitting there waiting to be taken... but hey, I could be wrong...


Also, how does it shield your assets If you are sued and lose, then all your assets are at risk, including your ownership in the corporation.... maybe there are some legal things that I am unaware of, but I do not see a lot of protection...

Now, going the other way... what can the corp do that would create liability Again, I do not see any way to cause a lawsuit by just trading... any thoughts?

 

[GrayHare]

But that is some BS IMO.... what expenses are you going to deduct For an individual I cannot see a big list of deductions that are sitting there waiting to be taken... but hey, I could be wrong...

There are many items which can be paid by one's portfolio management corporation rather than the individual, all of which reduce taxable income from the very first dollar. Anything that is used by the corp to service its portfolio become its expense: web, phone, even TV to get CNBC, WSJ subscription, etc. Then there's a computer to maintain accounts online, and the electricty that powers it. Perhaps the corporation hires an accountant or attorney. If IRS specs are met, the corp can have an office in your home, and pay for necessary maintenance, heating, cooling, etc. The list is long.

 

[Texas Proud]

There are many items which can be paid by one's portfolio management corporation rather than the individual, all of which reduce taxable income from the very first dollar. Anything that is used by the corp to service its portfolio become its expense: web, phone, even TV to get CNBC, WSJ subscription, etc. Then there's a computer to maintain accounts online, and the electricty that powers it. Perhaps the corporation hires an accountant or attorney. If IRS specs are met, the corp can have an office in your home, and pay for necessary maintenance, heating, cooling, etc. The list is long.

Yes, and taking out your friends and family for dinner to talk investments etc.... some are legit, some are not... however, I will agree that many people take all of the above even if they do not qualify... I do not think you can take an in home office through your corp as it does not own the corp... but, this is just a guess on my part... OH, you also open up a can of worms when it comes time to sell your house when you take a deduction...


Even if you take all of these, how much is it... $5K... maybe $10K.... so, unless you are going big (and the OP seems to be with the amount of money) then it seems to be a bit overkill IMO...

 

[green night]

Yes, and taking out your friends and family for dinner to talk investments etc.... some are legit, some are not... however, I will agree that many people take all of the above even if they do not qualify... I do not think you can take an in home office through your corp as it does not own the corp... but, this is just a guess on my part... OH, you also open up a can of worms when it comes time to sell your house when you take a deduction...


Even if you take all of these, how much is it... $5K... maybe $10K.... so, unless you are going big (and the OP seems to be with the amount of money) then it seems to be a bit overkill IMO...

Thanks for all the replies. So, I have $1.2 MM business... trading stocks , covered call options, investing, and let's say I pick up a rental property.

Let me do a little quick math to test the group. Let's. Say I have 100k in revenue. 3k in computer and tech, 7k in car lease and insurance, 5k in other, 5k for employee. That's 80k, solo 401k (can contribute 20% of net profits plus 17,500)... so 33,500.

Net - I'm paying taxes on $46,500?? All that could be high but I'm trying to test the theory. I know the car is aggressive but with a rental?

At some point, all the large investors made it a business.

 

[Texas Proud]

Thanks for all the replies. So, I have $1.2 MM business... trading stocks , covered call options, investing, and let's say I pick up a rental property.

Let me do a little quick math to test the group. Let's. Say I have 100k in revenue. 3k in computer and tech, 7k in car lease and insurance, 5k in other, 5k for employee. That's 80k, solo 401k (can contribute 20% of net profits plus 17,500)... so 33,500.

Net - I'm paying taxes on $46,500?? All that could be high but I'm trying to test the theory. I know the car is aggressive but with a rental?

At some point, all the large investors made it a business.

What kind of corp are your going for? LLC or S? (do not know what you can get away with here).

Are you going to be paying yourself? (if you go C, heck even if LLC or S)


I think the car is aggressive since you will not be using it primarily for your rental... but, you can be like my late BIL and play deduction roulette...

 

[pb4uski]

Unless the equipment and car is used exclusively for business then you're going to have to prorate the cost between business and personal (just like any sole proprietor).

But even if you can deduct it all then you're paying 35% corporate tax on that $46,500.

 

[green night]

Unless the equipment and car is used exclusively for business then you're going to have to prorate the cost between business and personal (just like any sole proprietor).

But even if you can deduct it all then you're paying 35% corporate tax on that $46,500.

Yea, I think that's where I need to learn more about the businesses, pay or dividend myself enough to live off and keep everything else in the business.

Also, health insurance through the business seems advantageous.

I was hoping someone on the site is doing something somewhat similar.

 

[Fermion]

I have thought about it, but mostly to get earned income and be able to fund a IRA or Roth IRA while retired. Perhaps also get the 50% match for people with low income (assuming the trading did not generate significant income above that level). 50% match to your Roth means you start out very ahead of the game.

I assume if you are a trader it is earned income?

 

[GrayHare]

I assume if you are a trader it is earned income?

AFAIK, if it's earned income there's no way to avoid paying Social Security tax.

 

[green night]

A couple adds and question:

First, again thank you for all the advice and comments.

In the business, I think ill buy a condo or townhouse that my kid can live in during college and use as an investment for other renters and especially longer term.

Can I keep all earnings in the business? For example if I make $100k on stock prices rising and dividends, rent, etc. I don't need to show any income from the business correct? I can continue to rollover paper gains etc over time, correct?

 

[pb4uski]

Not sure what your question is but if the business doesn't distribute income to you then you would not have any income... however, technically the business would have to impute the value of your kid's use of the condo and that would be income to you, just like any corporation who pays for the personal expenses of owners or executives... on other words, the benefit that you receive by having the company house your kid would be income to you and compensation paid by the corporation.

No such thing as a free lunch.