2026 Year-End Planning for Trading Entities: S-Corps, LLCs, and PTET

Last Updated on October 13, 2026 by Robert Green

In Part 1 of my 2026 year-end playbook, I covered the planning every trader should do before December 31: TTS, Section 475, excess business losses, QBI, wash sales, Section 1256, estimated taxes, and charitable giving. This post is for traders who trade through an S-Corp or LLC, or who are thinking about forming one for 2027.

If you’re used to fixing your personal taxes by April 15, entity planning works differently. Officer wages, 401(k) deferral elections, and PTET payments must be made by December 31 to count for 2026, and you can’t correct them after year-end. Expense reimbursements must also be paid by December 31 to be deductible in 2026. Only a few items, like the S-corp’s profit-sharing contribution, can wait until the return’s due date.

This post covers federal tax rules. PTET is set entirely by each state, and states often don’t follow federal rules on entity taxes, compensation, and retirement deductions. Check your state’s rules, or ask your tax advisor, before acting.

1. Start With TTS, Not the Entity

An entity isn’t a substitute for trader tax status. Without TTS, an S-corp or LLC is an empty shell: you’ve set up an expensive, complicated investment company that gets none of the trading-business benefits. The trading activity within the entity must qualify on its own, with substantial, frequent, regular, and continuous trading. Without TTS, the entity can’t deduct trading expenses, can’t use Section 475, and can’t support health insurance or retirement plan deductions. Qualify for TTS first, then decide whether an entity adds enough value.

2. Why Use an Entity?

A sole proprietor with TTS can deduct trading expenses and elect Section 475. That’s enough for many traders. An entity adds benefits a sole proprietor can’t get:

Health insurance and retirement plan deductions (S-corp only). Trading gains aren’t earned income, so a sole proprietor trader can’t base these deductions on them. Partners can’t receive W-2 wages from their partnership. An S-corp can pay you officer wages, and those wages support the self-employed health insurance deduction and Solo 401(k) contributions.
A fresh Section 475 election. A new entity can elect Section 475 internally, even if you missed the individual deadline.
Separating trading from investments. You might hold Apple stock personally as a long-term investment and trade Apple options through a TTS entity using Section 475.
A possible SALT cap workaround via your state’s PTET election (for partnerships and S-corps).

For more detail, including entity reporting on Forms 4797 and 8949, see my post E ntity Solutions for Active Traders: Tax Benefits, S-Corps, and Section 475.

3. Setting Up a New Entity for 2027

Timing. I prefer that traders form the entity and begin trading by October 1, so the entity has at least one full quarter of TTS activity. That’s my planning preference, not an IRS rule. A shorter first period needs a closer look at the facts, and forming an entity doesn’t establish TTS on its own. With October 1 behind us, I recommend starting a new entity on January 1, 2027. A late-2026 entity won’t rescue a weak 2026 trading year.

The new-taxpayer Section 475 election. A new taxpayer can elect Section 475 internally within 2 months and 15 days after the first day of its tax year (Rev. Proc. 99-17). For an entity starting January 1, 2027, I use March 15, 2027 as the deadline. A single-member LLC doesn’t work here, because the IRS disregards it and treats it as you. You need an LLC taxed as a partnership or an S-Corp. Here’s how I’d set it up:

Form an LLC in late 2026.
Make it a separate taxpayer effective January 1, 2027. Either add your spouse as a member, which makes it a partnership, or elect S-corp status.
Record an internal Section 475 election in the entity’s books by March 15, 2027. Keep reliable, date-stamped evidence that you made it on time.
Attach a copy of the election statement to the entity’s first federal return.
If you want an S-corp, file Form 2553 by March 15, 2027, for S-corp status effective January 1, 2027.

If 2027 is the entity’s first year owning securities, it generally doesn’t file Form 3115, because it has no prior accounting method to change. Existing partnerships and S-corps face the external deadline instead. They attach the election statement to the prior year’s return or extension, due by March 15 of the election year, and file Form 3115 with the return for the election year.

Pause and check your carryovers before electing Section 475. This is one of the most common traps I see. Forming an entity doesn’t eliminate your personal capital-loss carryovers, but capital gains are needed to absorb them. Once the entity elects Section 475, its trading gains are treated as ordinary income, and your carryovers can offset only $3,000 a year of that each year. Your carryovers can still offset capital gains from your other investments, but if most of your gains come from trading, they could go unused for years. If you have large carryovers, consider skipping the entity’s Section 475 election at first and letting its capital gains use them up. Then elect Section 475 in a later year.

Organization costs. The costs of setting up your entity, such as state filing fees and legal and accounting fees, are organization costs. You can deduct up to $5,000 in the first year. That $5,000 shrinks dollar-for-dollar once organization costs exceed $50,000, and you deduct the remainder over 15 years under Section 709 for partnerships and Section 248 for S-corps. Pre-opening trading business expenses are startup costs, with a separate $5,000 allowance (IRC § 195).

Count the costs. An entity means a separate federal and state tax return, payroll administration for an S-corp, retirement plan and health insurance reporting, and more formal bookkeeping. It can also mean state filing fees, franchise taxes, and minimum taxes. California, Illinois, New York City, and other places impose significant entity-level taxes. Forming your entity in Delaware or Nevada doesn’t avoid taxes in the state where you live and trade.

4. Business Expenses: Partnerships vs. S-Corps

Partnerships. Partners in an LLC taxed as a partnership can deduct unreimbursed partnership expenses, including a home office expenses, directly on their own returns. That works only if the partnership agreement requires partners to cover those costs, and it lets you clean things up after year-end.

S-corps. S-corp owners don’t get that option. Have the S-corp reimburse your business and home office expenses under an accountable plan. Reimburse by December 31 to deduct them in 2026. Reimbursements paid in 2027 are generally deducted in 2027, and expenses that are never reimbursed generally aren’t deductible at all.

5. S-Corp Health Insurance

If you own more than 2% of the S-corp, which most trading S-corp owners do, the S-corp should pay or reimburse your health insurance premiums for the months you had TTS and the S-corp was operating. The premiums go in Box 1 of your W-2, but not in Boxes 3 and 5, so they aren’t subject to Social Security or Medicare tax (IRS). You then deduct the premiums as self-employed health insurance on your Form 1040, using Form 7206. Two limits apply:

The deduction can’t exceed your Medicare wages from the S-corp (W-2 Box 5). The premiums themselves don’t count toward that limit, so you need officer wages at least equal to the premiums (Form 7206).
You can’t claim the deduction for any month you were eligible for a subsidized employer plan, including through your spouse.

6. How Much Salary Should You Pay Yourself?

Traders hate paying 15.3% in payroll taxes, but here’s the bottom line. If your S-corp is profitable, a reasonable salary is the key to your two biggest deductions: Solo 401(k) contributions and health insurance. No salary means no access to either.

The unearned-income view. For years, I’ve taken the position in Green’s Trader Tax Guide and on GreenTraderTax.com that a trading S-corp doesn’t need to pay reasonable compensation. Trading gains come from capital and market movements, not personal services, and the tax code treats them as unearned income not subject to self-employment tax (IRC § 1402(a)(3)). The IRS’s own guidance says receipts generated by “capital and equipment” can be paid out as distributions rather than wages (IRS). In my experience, the IRS and states haven’t challenged trading S-corps that don’t pay salary. But the IRS hasn’t formally accepted this view for traders, and the reasonable-compensation cases have involved service businesses, not trading.

My recommendation today. In practice, the question usually answers itself.

Profitable year: if your S-corp has significant trading gains, you’ll want officer wages anyway. The health insurance deduction and Solo 401(k) contributions are both based on officer wages, and wages also build your Social Security earnings record. Social Security is based on your highest 35 years of earnings, and trading gains passed through to you don’t count toward it. Neither do the health insurance premiums added to your W-2, since they’re excluded from Social Security wages. I set a year-end officer salary that’s reasonable, maximizes those deductions, and considers your Social Security record. That also helps address reasonable-compensation concerns. Use your projected full-year net trading income, after expenses, to make the call before the December payroll.
Loss year: if your S-corp has a net trading loss for the year, I generally don’t recommend a full officer salary, based on my unearned-income view. A loss alone doesn’t exempt you from reasonable-compensation rules, so review any services you provide, distributions, and other payments from the S-corp. Wages don’t count toward the excess business loss limit (IRC § 461(l)(3)(A)), so a big salary just makes the loss bigger. But a modest salary, at least equal to your health insurance premiums, is often worth it. Without salary, the premiums the S-corp pays are treated as income in Box 1 of your W-2, and the S-corp’s deduction for them offsets only that income. You get no real deduction for the premiums. Because the health insurance deduction is limited to your Medicare wages from the S-corp, a salary equal to the premiums is enough to deduct them in full. The cost is 15.3% payroll tax on that salary. Without salary, you also can’t make Solo 401(k) contributions for the year. Whether you can use the larger pass-through loss depends on your S-corp basis and the excess business loss limit.

If you’d rather rely on the unearned-income view in a profitable year, document why your trading profits come from capital rather than services, and talk it over with your tax advisor.

Payroll tax cost. Wages cost 15.3% in combined Social Security and Medicare tax, half paid by the S-corp and half withheld from you, up to the Social Security wage base. Weigh that against the higher future benefit, especially if you already have 35 years of substantial earnings.

Wages and QBI. Trading is a specified service business, so wages count toward the QBI deduction only within the phase-out range ($201,750 to $276,750 for single filers). In that range, a W-2 wage limit phases in, capping the deduction at 50% of W-2 wages, or 25% of wages plus 2.5% of qualified property (IRC § 199A(b)(2)–(3)). Officer wages help you keep more of the deduction. Below the range, you don’t need wages. Above it, the deduction is zero no matter what wages you pay. Wages also reduce the S-corp’s QBI, and the Solo 401(k) contributions and health insurance deduction they enable lower your taxable income, which can move you lower in the range or below it. Model the full trade-off: income tax savings, payroll tax cost, future Social Security benefits, retirement contributions, health insurance deductions, and QBI.

7. The Solo 401(k)

If your S-corp is profitable, the Solo 401(k) is the big deduction. Contributions are based on your officer wages, not the S-corp’s trading profit, so you can contribute in a loss year if you pay a salary. Weigh that against the payroll taxes and the larger pass-through loss. For 2026 (IRS):

You can defer up to $24,500 of your S-corp wages.
The S-corp can add a profit-sharing contribution of up to 25% of your wages. With a full $24,500 employee deferral, a $47,500 employer contribution brings you to the $72,000 overall limit and requires $190,000 of officer compensation.
If you’re 50 or older, you can add an $8,000 catch-up, for a total of $80,000. If you’re 60 through 63, the catch-up is $11,250, for a total of $83,250.
If you received more than $150,000 of 2025 FICA wages from the S-corp sponsoring the plan, your 2026 catch-up must go into a Roth (Notice 2025-67).
SECURE 2.0 also allows employer profit-sharing contributions to be made as Roth contributions, if your plan supports it. Unlike pre-tax contributions, Roth employer contributions are taxable to you in the year they’re allocated to your account and are reported on Form 1099-R. You get tax-free growth later, not a tax cut now. Confirm that your plan document and provider can handle Roth catch-up and Roth employer contributions before you rely on them.

Don’t trust your payroll provider blindly. These rules are new, and payroll companies and plan providers get them wrong. Before December 31, confirm that yours correctly handles the age 60–63 catch-up of $11,250 and the Roth catch-up requirement for owners with more than $150,000 of 2025 FICA wages. If your plan doesn’t offer a Roth option, an owner over that threshold can’t make catch-up contributions at all.

Timing matters. Your deferral election and payroll must be processed by December 31. The S-corp’s profit-sharing contribution can wait until the return due date, including extensions (September 15, 2027). As a bonus, pre-tax contributions reduce your taxable income, which can help with the QBI thresholds.

Year-end withholding. The IRS treats income tax withholding as if it were paid evenly throughout the year, even if it all happens in December. If you’re behind on estimated taxes, increasing your S-corp payroll withholding at year-end can cover earlier shortfalls. For state shortfalls, use state withholding.

8. PTET: The SALT Cap Workaround

The SALT cap. OBBBA raised the cap to $40,000 for 2025 and $40,400 for 2026. Higher earners lose part of it. For single filers, once your modified AGI exceeds $505,000, the cap shrinks by 30 cents for each additional dollar, down to a $10,000 floor, which you hit at about $606,333 of modified AGI (Schwab). The higher cap is scheduled to drop back to $10,000 in 2030.

The SALT marriage penalty. A married couple filing jointly gets the same $40,400 cap and $505,000 phase-out threshold as a single filer, not double those amounts. Married filing separately splits the cap in half for each spouse. That makes PTET especially valuable for married traders in high-tax states, because the entity’s deduction isn’t subject to the individual cap.

How PTET works. About 3 dozen states offer a pass-through entity tax (PTET) election for partnerships and S corporations. Each state sets its own PTET rules. The only federal piece is the IRS’s position in Notice 2020-75 that the entity can deduct the state tax it pays. That deduction reduces the income passed through to you and helps circumvent the SALT cap. Your state generally gives you a matching credit or other adjustment on your individual state return. PTET isn’t available to a sole proprietor filing Schedule C.

Why it still matters with a higher cap. If you’re over the cap or the phase-out has reduced it, PTET recovers the lost deduction. And because the entity takes the deduction, you may also be able to claim the standard deduction if it’s larger than your itemized deductions.

State PTET rules are a patchwork. Don’t assume your state’s PTET works like any other state’s. Eligibility, credits, add-backs, election procedures, and payment deadlines all vary. A missed state deadline can’t be fixed with federal rules. New York’s 2026 PTET election, for example, was due March 16, 2026, and New York doesn’t accept late elections. State estimated PTET payments have their own deadlines. New York’s fourth 2026 payment is due on December 15, 2026 (New York State Department of Taxation and Finance). Paying by December 31 matters for the federal deduction, but it doesn’t replace your state’s earlier payment due dates. And model your state’s entity-level taxes, such as California’s and New York City’s, before you form an entity. They can wipe out the savings.

Side effects. The PTET deduction also reduces your QBI.

Entity Tax Forms

Form 2553: S-corp election. For S-corp status effective January 1, 2027, file by March 15, 2027.
Form 1120-S: S-corp tax return.
Form 1065: partnership tax return.
Schedule K-1: your share of entity income or loss.
Form W-2: officer wages, including S-corp health insurance premiums in Box 1.
Form 7206: self-employed health insurance deduction, including for S-corp owners.
Form 4797: Section 475 ordinary trading gains and losses, with a statement listing each transaction.
Form 1099-R: reports Roth employer contributions, which are taxable in the year they’re allocated to your account.
Form 3115: Section 475 method change for existing entities. A new entity in its first year owning securities generally doesn’t file it.

My December 31 Entity Checklist

Decide on officer compensation: Project the S-corp’s full-year net trading income. If it’s profitable, set a reasonable salary that maximizes your health insurance and Solo 401(k) deductions. In a loss year, consider a modest salary at least equal to your health insurance premiums, so you can deduct them.
Run final payroll: Process officer wages, 401(k) deferrals, and withholding by December 31. Confirm that your payroll provider correctly handles the new catch-up rules.
Report health insurance: Have the S-corp pay or reimburse premiums by December 31 and include them in W-2 Box 1.
Reimburse expenses: Submit and reimburse business and home office expenses under your accountable plan by December 31.
Plan the profit-sharing contribution: Calculate it based on your W-2 wages and fund it by the return due date, including any extensions.
Confirm PTET: Make sure your state election is in place. Make state estimated payments by their due dates, which can come before December 31 (December 15 in New York), and pay by December 31 to deduct them in 2026.
Set up a 2027 entity: Make it effective January 1, 2027. File Form 2553 by March 15, 2027 if you want an S-corp, record the internal Section 475 election by March 15, 2027, and keep date-stamped proof.
Review capital-loss carryovers: Pause before electing Section 475 for the entity, and decide whether to delay it so the entity’s capital gains can absorb your carryovers.
Check your state’s rules: Confirm how your state treats entity taxes, PTET, and compensation.
Talk to your tax advisor: Meet in December, while you can still make these moves.

For the individual side of year-end planning, see Part 1: Trader’s 2026 Year-End Tax Playbook. For more on entities, see Entity Solutions for Active Traders, Green’s 2026 Trader Tax Guide (Chapter 7, “Entity Solutions,” and Chapter 8, “Retirement Plans”), and the tax center at GreenTraderTax.com.

This post is general information for educational purposes, not tax, legal, or investment advice. Your situation may differ, so consult a qualified tax professional before acting.