Trading As A Corporation
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The new tax law spells out that a C Corporation will have a tax rate of 21%. In prior years when the corporate tax was so high, I only recommended a C Corporation to a trader for very specific reasons. These reasons still exist, it’s just that most of us do not have the same needs as these very high income people. If you do, and you are trading you should spend a few minutes talking with me about ways to reduce your tax load.
For most of us this new tax rate is pretty darn low, and could help us to have more money to trade with as we pay lower taxes. Remember my admonishment that your most important job as a trader is managing your cash flow. With this in mind you should do everything you can do to reduce the amount of tax you pay, as this is the largest expense you have, whether or not you make or lose money trading in any given year. If the corporate rate is lower than your personal rate you might think about using a corporation to trade out of as there are a lot of other perks that go with a C Corporation.
But then again we’ve always heard that C Corporations are double taxed, so why would we? Are they really double taxed? Not unless the corporation pays a dividend to its shareholders. Seldom have I found a trader who needs to pay a dividend to get money out of the corporation, it is the least tax efficient technique; there are other methods to get the profit out of a corporation without paying any tax. So the strategy you must use is to know why you need to take the money out of the corporation, and then use the proper means to get it out to insure that you are remaining tax efficient and cash flow smart.
If you need to take payroll to fund a retirement plan you can pay yourself from the corporation, which then becomes a deductible expense to the corporation. If you contribute all of it into a self-directed 401K, there is no tax due at all!
If you need to take money out to live on, I can show you a way to get it out of the corporation (at least for a while) without paying any tax on it at all. After you take advantage of this method you might need to consult with us to find the most tax efficient method to use going forward, it may be to add an LLC to the mix, owned by you and the corporation. The profit you are making trading in the LLC would then flow through to the owners of the LLC, the Corporation and you. to grow at a lower tax rate. Plus the money you take out of the LLC to live on will tax strategies that you can employ to lower your taxes, you just have to select one that is not too aggressive and completely legal.
I talked about other perks when you use a corporation to trade in. I will try to list them by the level of importance “I” assign them, your order may be different, and that is OK. Remember there is no cookie cutter approach to tax savings; it depends on the individuals involved.
1. A Corporation has a lower tax rate than you and I do. Therefore if you are in a high tax bracket, why trade in your own name, or in a pass through entity? When you do that you will pay taxes on your profit at your personal tax rate. When you earn enough from your trading you will raise your tax bracket. Instead, form a Trading C Corporation through Traders Accounting. It is a separate taxpayer. Therefore with your brokerage account owned by the corporation all of the profit will be taxed at that lower rate.
2. Medical Reimbursement Plan. A C Corporation and only a C Corporation can sponsor a Medical Reimbursement Plan for its employees. In a momma-papa corporation the shareholders become the officers and employees, so the corporation is sponsoring this plan for the shareholders. What it does, is allow the corporation to reimburse you for all of your out of pocket medical expenses, including medical insurance (don’t forget if you are on Medicare you are paying for it). All long term care insurance costs. Anything not covered by your insurance, co-pays, prescriptions, and even some over the counter medicinal products. During the month you keep track and the receipts for any of these medical expenses. At the end of the month you turn an expense report, along with the receipts into the corporation, who can then write yourself a check for the total amount. At that point it becomes a deductible expense for the corporation, but does not become income to you. Ain’t life great? Remember though this has to have the proper documentation in your corporate paperwork to be active.
3. Asset Protection. While a trading organization will probably never be sued, in this litigious society we live in, you personally can be sued for anything or nothing. If someone were to sue you over something you or one of your family members did, and they won, it is conceivable that they could award your trading account to satisfy the judgment against you. If you are trading in a corporation your trading account will be completely protected.
4. Deduction of all business expenses.
5. Investigory Expense Deduction. Deduct your business expenses from the 12 months preceding the set up of the Corporation.
As you can see, there are a multitude of reasons to set up a corporation to trade out of. However as I have previously stated, there is not a cookie cutter approach to tax efficiency. That is why Traders Accounting offers a free 30 minute consultation to ascertain which, if any, business type would be best in your situation.
Call us today at (800) 938.9513 to schedule your appointment. Quit losing the ability to become cash flow competent in your trading. Don’t put this off, as you are losing deductions everyday which affects the amount of money you have to trade with.