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Traders Tax - Trading Through a C-Corp

June 2004
by Joe Wishcamper, Esq.

www.tradersaccounting.com
 

 

Depending on your individual circumstances, a C-corporation may be a great choice if you’re doing business as a trader. Since a corporation is a legal entity, with the right to sue and be sued, and the right to enter into contractual agreements, it, like any other “individual,” pays its own taxes. Even better, a C-corporation gives you and other shareholders personal asset protection.

A C-corporation brings you many other benefits as well, such as the ability to amortize pre-existing and start-up expenses, depreciate business assets, and maximize allowable write-offs.

In fact, corporate deductions are so wide reaching that frankly, if your expense is ordinary and necessary, it’s deductible.

For those who think starting a corporation means starting a company like Microsoft, you’ll be pleased to learn that your corporation can be any size. In fact, you need only one person, yourself, to fill the roles of officer, director and shareholder. You can be your own corporation! Your family members may participate in the corporation as well, as you’ll see in other articles.

Of course, corporations have their downside too, the major one being double taxation. If you form a corporation, its profit is taxed on the corporate level. And if you pay those once-taxed profits out by way of shareholder dividends, the recipient shareholders, i.e. you, must report the payment as dividend income, creating two taxes on the same profit. However, you can easily avoid double taxation if you’re a sole owner corporation. Simply use extra funds to invest in another LLC trading vehicle rather than paying out dividends.

Another downside to a corporation is that if the corporation has net trading losses, those losses do not flow through to the owners (you). Since the corporation is a stand-alone taxpayer, those losses stay with the corporation.

This is unpleasant since you, as an owner/shareholder, would like to get the benefit of that trading loss to offset other income you might have, at least to some extent. If the corporation has a net operating loss (NOL), the corporation can carryback and carryforward that NOL, subject to certain specific rules, where the loss can then offset income. So the corporation gets a tax benefit from the loss, but you as an owner will not.

 

Who Should Use the C-Corporation for Their Trading Business?

The C-corporation, by itself, works well if you’re looking to grow your wealth by long-term investing rather than using profits for the short-term. One of the main advantages is that the C-corporation has its own tax brackets. For example, instead of your trading gains being taxed at your personal tax rates, the first $50,000 of profits in your C-corporation are taxed at just 15%. In addition, the C-corporation is unique in that it gives you the ability to write-off 100% of all medical expenses by means of a self-insured medical reimbursement plan, including long-term care and other related expenditures. If you’re in this situation, the C-corporation may be right for you.

by Joe Wishcamper, Esq.

www.tradersaccounting.com

Information, charts or examples contained in this lesson are for illustration and educational purposes only. It should not be considered as advice or a recommendation to buy or sell any security or financial instrument. We do not and cannot offer investment advice. For further information please read our disclaimer.

 




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