This is a series about the 5 Most Expensive Tax Mistakes That Traders Make. Many people do not think of stock investing and stock trading as a business. But if you make a decent income from stocks, options, futures, forex, bonds, or commodities, consider the extra benefits setting up a small trading business would provide.
Mistake #1. The Wrong Business Structure
Most traders start out operating their business as a sole proprietor or unincorporated business. This entity is the easiest to establish and least expensive to maintain. But that doesn’t necessarily make it the best structure for your trading business. For instance, if you are a single owner, you’ll have no way of creating “earned” income from your trading business to be able to take advantage of tax cutting strategies such as healthcare and retirement plans. Trading as a sole proprietor can also limit you on the amount of your home office deduction.
Some traders go on to establish a corporation, partnership, or limited liability company to run their trading business. But which one is right for you?
Most traders will want to establish a “pass” through entity such as a S-Corp, LLC, or partnership. These entities are not taxed at the corporate level. Trading gains “pass” through to the owner’s personal tax return. C-Corporations are taxed at the corporate level and then again on the owner’s personal tax return, making them a poor choice for traders. However, Ccorporations provide the most employee benefit tax breaks.
Choosing the wrong entity can waste thousands in taxes and fees, year after year, for as long as you operate your business.
Trader Tax Coach will evaluate your business to see which entity makes the most sense for you. And we’ll keep evaluating your business as we work together to make sure you have the best possible structure going forward.
Part 2. Why Are You Not Hiring Your Kids?.
Part 3. Missing Health Care Strategies.
Part 4. Wrong Home Office Deduction.
Part 5. Mark to Market Election.