Once you’ve been trading long enough to experience several runs of success, you might want to consider leaving your day job and turning your love of trading into a business. Through setting up a business, you can. For tax purposes, this can be a real plus. However, it’s also a pretty big step. Even if you don’t want to quit your day job, but you want to set up a business structure, you can still reap the tax benefits.
Types of Trading Entities
One of the most common types of businesses for traders is a Limited Liability Company or an LLC. The tax laws regarding LCCs vary from state to state, so you’ll need to check the law where you live to ensure that this is a beneficial step for you. However, the LLC’s point is to keep your personal investments separate from your trading capital to limit your liability. Most likely, you will be the sole owner of your company. The next task is to choose a name for your business. In the Articles of Organization, you’ll need to give the company’s name, purpose, physical address, other members, their percent of ownership, and their signatures. After this is done, apply it to your Employee Identification Number (EIN). This is the number that you’ll use on your trading accounts and tax forms. It keeps your social security number separate from your trading entity.
End of Year Filing
If you are showing a loss at the end of the year, you can use the net operating loss tax laws to your benefit. With these laws, you can eitheror forward it to the next year. So, for instance, if you make a mind-boggling amount of money in one year and pay a small fortune in taxes, you can carry back the net operating losses and claim a refund. Another advantage of forming a business is that you can often write off expenses such as retirement plans, health insurance premiums, medical expenses, and of course, all the equipment you purchase for the business. This can include professional subscriptions, computers and computer equipment, and trading software programs. If you meet with professionals over lunch, include that in your expenses. Other deductions can be conventions, travel, and educational programs. If your business is in your home, you can usually write off a portion of the home expenses, such as telephone and electricity. Business traders can use Schedule C to take depreciation on their business equipment, such as computers.
Qualifications for Setting up Business
This is not meant for random or casual traders. Traders who set up a business are those who are making substantial gains and who are continually and regularly trading. For anyone fitting these criteria, the business can take advantage of the tax laws and avoid paying more taxes and fees than necessary.