How to Set Up A Trading Business For Optimal Tax Savings

June 18, 2022 | By: Robert A. Green, CPA | Read it on

If you are eligible for trader tax status (TTS), consider setting up a trading business to maximize tax benefits. Some traders benefit from an LLC; others don’t need one.

  • Deduct trading business expenses.

  • Elect Section 475 MTM for exemption from wash sales and the capital loss limitation.

  • Be eligible for a 20% qualified business income QBI deduction on Section 475/TTS income.

  • Deduct health insurance and high-deductible retirement plan contributions.

  • Deduct state and local taxes (SALT) as a pass-through entity (PTE) business expense avoiding the $10,000 SALT cap.


How to be eligible for trader tax status

Volume: Make four trades per day, 16 trades per week, 60 a month, and 720 per year on an annualized basis (Poppe court). Count each open and closing transaction separately.

Frequency: Executes trades on nearly four weekly days, around a 75% frequency rate.

Holding period: In the Endicott court, the IRS said the average holding period must be 31 days or less. That’s a bright-line test.

Trade full-time or part-time. For a good portion of the day, the markets are open.

Hours: Spend more than four hours daily, almost every market day, working on the trading business — all time counts.

Avoid sporadic lapses: Once TTS commences, avoid lapses in the trading during the year. Trading must be regular, frequent, and continuous.

Intend to run a business and make a living. It doesn’t have to be a primary living.


Operations: Have significant business equipment, business services, and a home office.


Account size: Securities traders need to have $25,000 on deposit with a U.S.-based broker to achieve pattern day trader (PDT) status. For the minimum account size, we like to see more than $15,000.

See https://greentradertax.com/trader-tax-center/trader-tax-status/how-to-qualify/  

What doesn’t qualify for TTS?

A third party creates the automated trading system (ATS) with entry and exit signals and mechanical execution. Some ATS don’t come with automatic execution, and traders significantly depart from ATS signals so that the trader can count those trades. A self-created ATS counts for TTS. Many traders come from the tech world and design and code an ATS.

A trade copying service does not count for TTS unless you depart from recommended trades significantly.

Engaging an outside investment advisor.

Trading in retirement funds.

Choice Of Entity

File a Schedule C with Form 1040

An individual TTS trader deducts business expenses, startup costs, and home office deductions on a Schedule C (Profit or Loss From Business – Sole Proprietorship) as part of the 1040 filing.

Traders don’t have revenue on Schedule C; they report trading gains and losses on other tax forms.

Schedule C expenses are an above-the-line deduction from gross income.

TTS Schedule C expenses also reduce self-employment income (SEI). However, trading income is not SEI unless you are a full futures exchange member per Section 1402(i). 


Trading income is net investment income (NII) for the 3.8% net investment tax on NII over ACA thresholds.

Individual brokerage account

You can establish an individual brokerage account(s) in the trader’s name and social security number. 

You can also use a joint individual account, but first, list the trader’s name and social security number.

If the husband trades the spouse’s account, neither can qualify for TTS.

Individuals pay non-professional rates for real-time data, whereas entities might owe higher professional rates.

No election or filing need for TTS

There isn’t a tax election for claiming TTS — it’s determined based on facts and circumstances assessed at year-end.

A TTS trader can elect Section 475 to treat MTM as ordinary gain or loss. But the 475 election is due early in the tax year.

TTS is like undergraduate school, and Section 475 is like grad school. You can claim TTS after the fact, but not 475. That hurts many traders in 2022, especially if they rack up massive losses and miss the 475-election deadline for existing individuals due by April 18, 2022. (March 15 for partnerships and S-Corps).

Single-member LLC

If you want asset protection, consider a single-member LLC (SMLLC) taxed as a “disregarded entity.” That’s a “tax nothing” in the eyes of the IRS. You still file as a TTS sole proprietor on Schedule C.


Traders don’t have investors or clients; that would be an investment management business subject to liability concerns.

A TTS trader might hire employees, lease an office, co-locate automated trading equipment with a broker, and use massive leverage. These traders should consider liability protection using an SMLLC. Consult an attorney. 


An SMLLC can also elect S-Corp or C-Corp tax status.

Business expenses with trader tax status

Tax-deductible business expenses include home-office, education, startup expenses, organization expenses, margin interest, tangible property expense, Section 179 (100%) or 100% bonus depreciation, amortization on software, self-created automated trading systems, mentors, seminars, market data, charting services, stock borrow fees, and much more.

See https://greentradertax.com/trader-tax-center/trader-tax-status/trading-business-expenses/  

Section 475 tax benefits

TTS traders are entitled to make a Section 475 election, but investors may not.

The election exempts securities trades from wash-sale loss (WS) adjustments, which can defer tax losses to the subsequent year and the $3,000 capital loss limitation. Ordinary loss treatment is better; it can generate tax refunds faster.

A TTS/475 trader is eligible for a 20% qualified business income (QBI) deduction if under the taxable income threshold for a “specified service trade or business” (SSTB). QBI includes 475 ordinary income less TTS expenses, excluding capital gains and portfolio income.

Section 475 election process 

The deadline for a  TTS trader to elect Section 475 for 2022 has passed; it was April 18, 2022, for individuals and March 15, 2022, for existing partnerships and S-Corps.

A partnership or S-Corp formed during the tax year is considered a “new taxpayer,” which can elect Section 475 internally within 75 days of inception. A new entity comes in handy for selecting 475 later in the year.

See https://greentradertax.com/how-traders-elect-475-to-maximize-their-tax-savings/  

The qualified business income deduction

TCJA introduced a tax benefit for pass-through businesses, which includes a TTS trader with Section 475 income: whether doing business as a sole proprietor, partnership, or S-Corp.

Section 199A provides a 20% QBI deduction on a “specified service trade or business” (SSTB), and TTS trading is an SSTB.

SSTBs are subject to a taxable income threshold, phase-out range, and an income cap. The phase-out range has wage and property limitations, too.

As an SSTB, TTS traders have a taxable income (TI) cap of $440,100/$220,050 (married/other taxpayers) for 2022. The phase-out range below the cap is $100,000/$50,000 (married/other taxpayers), in which the QBI deduction phases out for SSTB. The W-2 wage and property basis limitations also apply within the phase-out range. 

For example, on $100,000 of TTS/475 income, the trader might get a $20,000 tax deduction.

LLC taxed as a partnership

A TTS trader can organize a spousal-member LLC and file as a partnership. Only one spouse needs to be an active trader.

LLC/partnerships file a Form 1065 partnership tax return and issue Schedule K-1s to owners.

LLC/partnerships must qualify for TTS; otherwise, they are investment companies.

With TTS, report business expenses on page one of 1065. List net 475 income or loss, less TTS expenses on line one of the Schedule K-1 “ordinary business income (loss).” Use separate K-1 line items for portfolio income, including capital gains and losses, interest, and dividends.

The owner reports Schedule K-1 ordinary business income (loss) on Form 1040 Schedule E in the active column.

It’s not a passive activity in Section 469 under the “trading rule” exception. However, losses are limited to “basis” (your net investment in the partnership). (Sole proprietor TTS traders also need a basis for deducting losses.)

Report capital gains/losses and portfolio income separately on 1040—schedule B for interest and dividend income and Schedule D for capital gains and losses from partnerships.

If the partnership agreement provides for it, the partner can also deduct “unreimbursed partnership expenses” (UPE), including home office expenses, on Schedule E page 2. (It’s more formal with an S-Corp.)

An LLC/partnership provides a ring-fencing solution and the SALT cap workaround strategy. It cannot generate earned income for the health and retirement plan deductions; you need an S-Corp for employee benefits.

Ring-fence trading from investments with a partnership or S-Corp

If you trade substantially-identical positions that you invest in a taxable account, it could invite the IRS to play havoc with reclassification. It can also undermine eligibility for TTS. For example, you invest in Apple and Microsoft equities for the long-term and also trade Apple and Microsoft equity options around those investment positions. 

A partnership or S-Corp can fix this problem. The entity can ring-fence TTS/475 trading positions, segregating them from overlapping investments on the individual level. But that isn’t easy if you want to maximize portfolio margining.

This entity solution prevents the IRS from reclassifying TTS positions out of Section 475 ordinary losses into a capital loss limitation and, alternatively, reclassifying unrealized long-term capital gains into MTM income.

If you don’t have overlapping investments, you don’t need a ring-fencing entity solution.

Avoid permanent wash sale losses between taxable and IRA accounts

If you trade substantially-identical positions that you also invest in IRAs, it could trigger losses for permanent wash sale loss adjustments (WS). Brokers don’t recognize this problem on 1099-Bs; the IRS permits them to take a narrow view of WS.


Take a loss on X in a taxable account and repurchase X within 30 days before or after in an IRA, and it’s a permanent WS loss. There is no way to record the WS cost basis adjustments in the IRAs; hence it’s permanent. Conversely, with WS in taxable accounts, you defer the loss to the replacement position, which the broker does on the 1099-B. 

There are three ways to avoid these IRA-generated WS. Use a do not trade or invest list to prevent overlap, elect 475 on trades, or use a ring-fencing entity solution. If you only trade an IRA account, there is no WS; it’s only a problem between taxable vs. IRS accounts with overlap. 

SALT cap workaround laws

In 2018, TCJA capped SALT itemized deductions at $10,000 per year, including state and local income taxes, property, and sales taxes. Over 20 states provide relief with SALT cap workaround laws. Business owners of partnerships or S-Corps are entitled to make SALT payments through the entity and get a credit on their individual tax returns. That converts non-deductible SALT into a business expense.

Search “SALT cap workaround” with your state. Act on time to get this deduction; it requires planning.

See https://greentradertax.com/category/salt/

LLC taxed as an S-Corp

Organize a single-member or spousal-member LLC and elect S-Corp status with the IRS within 75 days of inception (date on the certificate of formation).

Alternatively, in a subsequent year, the LLC can submit an S-Corp election by March 15. 


Owners must be U.S. residents.

An LLC/S-Corp can achieve the ring-fencing and SALT cap workaround solutions of partnerships previously discussed.
 Consider an S-Corp if you also want health insurance and retirement plan deductions.

See https://greentradertax.com/trader-tax-center/entity-solutions/  

Health insurance deduction with an S-corp

TTS traders with significant health insurance (HI) premiums should consider an S-Corp to arrange an AGI tax deduction.

The trader or spouse might have another source of self-employment income to deduct HI. A spouse might have HI coverage for the family in their job. Cobra is not deductible HI since it’s employer-provided.

Add reimbursement of HI premiums to officer compensation, and that portion of salary is not subject to payroll taxes (social security and Medicare). The trader then can take an AGI deduction for the HI premiums on their Form 1040. (It’s quirky).

A TTS sole proprietor or partnership cannot deduct HI based on trading income.

Retirement plan contribution/deduction with an S-Corp

Traders need “earned income” to make and deduct retirement plan contributions and health insurance premiums; however, trading income is unearned.

TTS sole proprietors and partnerships cannot create earned income, whereas S-Corps can pay officer compensation, generating earned income.

Payroll taxes apply on officer compensation (wages): 12.4% FICA capped on salaries up to $147,000 for 2022, and the 2.9% Medicare is unlimited. There’s a 0.9% surtax over the ACA income threshold.

Upper-income traders convert Medicare tax on unearned income (net investment tax) into Medicare on earned income, so it’s not redundant.

Annual payroll at year-end

TTS traders should fund retirement plan contributions from net income, not losses.

It’s okay to have a loss generated by the HI reimbursement portion of compensation.

It’s best to wait on the execution of an annual paycheck until early December when there is transparency for the year.

Solo 401(k) elective deferral

If you have sufficient trading profits for the year, consider establishing a Solo 401(k) retirement plan before year-end.

Start with the 100% deductible elective deferral (ED; $20,500 for 2022) and pay it through payroll. Deduct it on the annual W-2.

Taxpayers 50 years and older have a “catch-up provision” of $6,500, raising the 2022 ED limit to $27,000 annually.

The ED can be contributed to a Roth IRA, forgoing the tax deduction on the contribution. Roth plans are permanently tax-free, whereas traditional programs provide deferral of income.

Solo 401(k) profit-sharing plan

Consider a 25% deductible Solo 401(k) profit-sharing plan (PSP) contribution if you have sufficient trading gains. Increase payroll in December 2022 for a performance bonus. You don’t have to pay into the retirement plan until the due date of the S-Corp tax return (including extensions by September 15, 2023).

The maximum PSP amount for 2022 is $40,500, increased by $2,000 from 2021.

The total 2022 limit for a Solo 401(k) is $67,500 ($20,500 ED, $6,500 catch-up ED, and $40,500 PSP).

See https://greentradertax.com/trader-tax-center/retirement-solutions/ and


https://greentradertax.com/how-some-traders-double-up-on-retirement-plan-contributions/  

https://www.shrm.org/ResourcesAndTools/hr-topics/benefits/Pages/irs-benefits-contributions-limits-chart-2022.aspx

C-Corps are not suitable for traders

C-Corps are not ideal for traders since the IRS might charge a 20% “accumulated earnings tax” (AET) on top of the 21% flat tax rate.

It’s hard for a trader to have a war chest plan to justify retaining earnings and profits (E&P). Otherwise, AET applies to E&P.

There’s double state taxation to consider, too.

See https://greentradertax.com/how-to-decide-if-a-c-corp-is-right-for-your-trading-business/  

Traders are eligible for some business tax benefits and have unique needs. For example, their income is unearned, yet it can qualify for QBI deductions with a 475 election and the SALT cap workaround as capital gains or 475 income. Creating earned income for employee benefits requires the S-Corp. A local accountant might follow their intuition and give wrong advice. TTS benefits are quirky and challenging to arrange correctly. This blog post should help and consider a consultation with a trader tax expert. 

 


How Traders Elect 475 To Maximize Their Tax Savings

February 3, 2022 | By: Robert A. Green, CPA | Read it on

Avoid wash sale losses and the $3,000 capital loss limitation and qualify for a 20% QBI deduction.

The most significant problem for investors and traders occurs when they cannot deduct trading losses on tax returns, significantly increasing tax bills or missing opportunities for tax refunds. Investors are stuck with this problem, but business traders with trader tax status (TTS) can avoid it by filing timely Section 475 mark-to-market (MTM) elections for business ordinary tax-loss treatment for securities and/or commodities (Section 1256 contracts).

Profitable traders might also benefit from Section 475. If a TTS trader wants to be eligible for a 20% qualified business income (QBI) deduction, she should consider electing Section 475 ordinary income treatment. The QBI deduction is not allowed if the taxpayer exceeds a taxable income threshold because trading is a specified service business. (See more below).

Capital losses vs. 475 ordinary losses
Securities and Section 1256 investors are stuck with capital-loss treatment, meaning they’re limited to a $3,000 net capital loss against ordinary income. The problem is that their trading losses may be much higher and not valuable as a tax deduction in the current tax year. Capital losses first offset capital gains in full without restriction. The rest are a capital loss carryover to the following tax year(s). Many traders wind up with little money to trade and unused capital losses. It can take many years to use up their capital loss carryovers. What a tragic waste! Why not get tax savings from using Section 475 MTM right away? 

Traders qualifying for TTS have the option to elect Section 475 MTM accounting with ordinary gain or loss treatment in a timely fashion. You can offset wage and other income with MTM ordinary losses, navigating around the capital loss limitation. When traders have negative taxable income generated from business losses, Section 475 accounting classifies them as net operating loss (NOL) carryovers.

Caution: Individual business traders who missed the 2021 Section 475 MTM election date (May 17, 2021, one-month pandemic postponement deadline, and June 15, 2021, for Texas, Oklahoma, and Louisiana under federal storm disaster relief) can’t claim this treatment for 2021 and will be stuck with capital-loss carryovers to 2022.

Taxpayers without a significant capital-loss carryover may want to consider electing Section 475 for 2022 by the deadlines of April 18, 2022, or March 15, 2022, for existing partnerships and S-Corps. (See 475 election procedures below.)

A “new taxpayer” (new entity) set up after April 18, 2022, can deliver Section 475 MTM for the rest of 2022 on trading losses generated in the entity account if it files an internal Section 475 MTM election within 75 days of entity inception. This election does not change the character of capital loss treatment on the individual accounts before the entity’s start date.

Section 475 trades are exempt from wash sale loss adjustments
The election exempts the Section 475 transactions from wash-sale loss (WS) adjustments on securities, which would otherwise defer tax losses to replacement positions. If WS happens around year-end, it might create a phantom taxable income because it defers tax losses to the subsequent year.

Section 475 MTM allows current-year trading losses to be ordinary business losses rather than a $3,000 capital loss limitation. It generates significant tax breaks immediately, rather than being stuck with large capital-loss carryovers to subsequent tax years. Many traders enjoyed trading gains in 2020 and 2021, and tax-loss insurance was not essential. However, 475 ordinary loss treatments might be crucial in 2022.

Section 475 MTM also reports year-end unrealized gains and losses as marked-to-market, which means one must impute sales for all open trading business positions at year-end using year-end prices. Many traders have no open business positions at year-end, anyway. They report the realized and unrealized gains and losses, like Section 1256, which has MTM built-in by default — but don’t confuse Section 1256 with Section 475. MTM treatment is what makes wash sale losses a moot point.

Section 475 is ideal for securities traders.
Securities traders usually elect Section 475 MTM unless they already have significant capital-loss carryovers. Traders can’t offset MTM ordinary trading gains with capital-loss carryovers; only use capital gains (such as gains from segregated investment positions or Section 1256 contracts) in such a manner. However, suppose a trader generates significant new trading losses before April 18, 2022. In that case, she might prefer to elect Section 475 MTM for 2022 by that sole proprietor election date to have business ordinary-loss treatment retroactive to January 1, 2022. The trader can form a new entity afterward for a “do-over” to use capital gains treatment and get back on track with using up capital loss carryovers. Alternatively, the trader can revoke the Section 475 election in the subsequent tax year.

Consider electing Section 475 on securities only to retain lower 60/40 capital gains rates on Section 1256 contracts.

Excess business losses and net operating losses
Starting in 2018, The Tax Cuts and Jobs Act (TCJA) repealed the two-year NOL carryback, except for certain farming losses and casualty and disaster insurance companies. These TCJA changes mean NOLs are carried forward indefinitely (20 years before the TCJA changes), and the deduction of NOLs is limited to 80% of the subsequent year’s taxable income.

TCJA also introduced an “excess business loss” (EBL) limitation of $500,000 married and $250,000 for other taxpayers. The inflation-adjusted 2021 EBL is 524,000 (married)/$262,000 (other taxpayers) and 2022 EBL is $540,00 (married)/$270,00 (other taxpayers). Business ordinary losses over the EBL limits are an NOL carryforward.

The 2020 CARES Act suspended the EBL limitation for 2018, 2019, and 2020 and allowed five-year NOL carrybacks for those years. Taxpayers can recalculate the NOLs without the EBL limitation and file a carryback refund claim if it makes sense. For example, carry back a 2020 NOL to 2015 and any unused NOL to 2016 and subsequent years. TCJA’s NOL and EBL rules applied again in 2021 and 2022.

20% deduction on qualified business income
TCJA introduced a new tax deduction for pass-through businesses, including sole proprietors, partnerships, and S-Corps. Subject to haircuts and limitations, a pass-through business could earn a 20% deduction on qualified business income (QBI).

QBI includes Section 475 ordinary income and loss and trading business expenses. QBI excludes capital gains and losses, Section 988 forex ordinary income or loss, dividends, and interest income.

Traders eligible for TTS are a “specified service activity,” which means if their taxable income is above an income cap, they won’t receive a QBI deduction. The taxable income (TI) cap is $429,800/$214,900 (married/other taxpayers) for 2021, and $440,100/$220,050 (married/other taxpayers) for 2022. The phase-out range below the cap is $100,000/$50,000 (married/other taxpayers), in which the QBI deduction phases out for specified service activities. The W-2 wage and property basis limitations also apply within the phase-out range. 

TCJA favors non-service businesses, which are not subject to an income cap. The W-2 wage and property basis limitations apply above the TI threshold of $329,800/$164,900 (married/other taxpayers) for 2021 and $340,100/$170,050 (married/other taxpayers) for 2022. The IRS adjusts the annual TI threshold for inflation each year. 

Sole proprietor TTS traders cannot pay themselves wages, so they likely cannot use the phase-out range, and the threshold is their cap.

475 election procedures
Section 475 MTM is optional with TTS. Existing taxpayer individuals who qualify for TTS and want it must file a 2022 Section 475 election statement with their 2021 tax return or extension by April 18, 2022—existing partnerships and S-Corps file in the same manner by March 15, 2022.

Election statement. The MTM election statement is a short paragraph; unfortunately, the IRS hasn’t created a tax form for it. It’s a version of the following: “According to Section 475(f), the Taxpayer elects to adopt the mark-to-market method of accounting for the tax year ending December 31, 2022, and subsequent tax years. The election applies to the following trade or business: Trader in Securities as a sole proprietor (for securities only and not commodities/Section 1256 contracts).” If a trader expects to have a loss in trading Section 1256 contracts, he can modify the parenthetical reference to say, “for securities and commodities/Section 1256 contracts.” But remember, the lower 60/40 tax rates on Section 1256 contracts will no longer apply. If the taxpayer trades in an entity, he should delete “as a sole proprietor” in the statement.

Form 3115 filing. Don’t forget an essential second step: Existing taxpayers complete the election process by filing Form 3115 (change of accounting method) with the election-year tax return. Complete a 2022 MTM election filed by the April 18, 2022 deadline on Form 3115 filed with your 2022 tax returns — by the due date of the return, including extensions. 

Submit Form 3115 in duplicate — one goes with Form 1040 filing, and a second goes to the IRS national office. There’s no fee for filing Form 3115, and the election is automatic. That means the IRS should not confirm this election statement or the Form 3115 filing.

Forms 4797 and 3115 include a section for reporting a Section 481(a) adjustment, which is required when making a change of accounting. The rest of the multi-page Form 3115 relates to tax law, code sections, etc. This adjustment converts your bookkeeping from cash to MTM on January 1 of the election year.

After filing their Section 475 election statement, some traders changed their minds and wanted to skip the Form 3115 filing. That’s wrong and incumbent on them to finish up the election process. If a trader doesn’t qualify for TTS, they can’t use Section 475, but that must be based on accurate facts and circumstances and not on a whim. It’s essential to be consistent and credible with the IRS.

Internal elections for new entities
The Section 475 election procedure is different for “new taxpayers” like a new entity. Within 75 days of inception, a new taxpayer may file the Section 475 election statement internally in its records. The new entity does not have to submit Form 3115 because it’s adopting Section 475 from the start rather than changing its accounting method. One way to file an internal resolution is for the taxpayer to send himself an email resolution (election), which has a timestamp for proof of timely election.

Individuals are “new taxpayers” only if they have never filed an income tax return before. A new trader is not necessarily a new taxpayer for a 475 election.

Election to revoke section 475
The IRS makes revocation a free and easy process, mirroring the Section 475 election and automatic change of accounting procedure for existing taxpayers. A taxpayer cannot re-elect Section 475 for five years after revocation.  

Segregation of investments
Suppose a trader holds investment positions in equities and trades substantially identical securities positions in equities or equity options using TTS and Section 475. During a tax exam, an IRS agent could recharacterize trades as investments, or vice versa, whichever suits them best. For example, the IRS could reclassify an investment position in Apple equity currently deferred for long-term capital gains into Section 475 MTM ordinary income at year-end. Alternatively, the IRS could recharacterize Section 475 MTM ordinary losses on Apple options as capital losses triggering a $3,000 capital loss limitation.

Traders with overlap between investing and trading activity should consider ringfencing TTS/475 trading into an entity and conducting their investment activity on the individual level. That solution would fix the above potential IRS problem.

475 fixes wash sales with IRAs for TTS trades
If there is an overlap in what you trade in taxable accounts vs. what you invest in IRAs, the trader must avoid triggering permanent wash-sale losses throughout the year. Suppose a trader takes a loss in a taxable account and buys back a substantially identical securities position 30 days before or after in an IRA account. In that case, the wash-sale loss disenfranchisement becomes permanent.

To avoid such overlap, traders can fix this problem with a “do not invest” list. One strategy is to trade equities and equity options in taxable accounts and invest in ETFs, mutual funds, and REITs in IRAs. 

TTS traders can make a Section 475 election to do away with wash sales between taxable accounts and the IRAs, so overlap is not a problem.

Consider all IRA accounts for married filing joint, including traditional IRAs, Roth IRAs, rollover IRAs, and SEP IRAs. Don’t include qualified plans like 401(k) or solo 401(k) plans.

Most traders are unaware of the nuances of triggering permanent wash sales between taxable and IRA accounts. IRS rules for broker-issued 1099-Bs have a narrow view of wash sales; they call for wash-sale loss adjustments on “identical symbols” for the one account. Conversely, IRS wash sale rules for taxpayers have a broader view: Calculate wash sales on “substantially identical positions” (between equities and equity options) on all individual brokerage accounts, including IRAs. Consider using trade accounting software compliant with IRS wash-sale rules for taxpayers.

Section 475 is a consequential election for TTS traders with many advantages but first, consider personal circumstances and nuances.

Learn more about Section 475 in Green’s 2022 Trader Tax Guide.

If you seek advice on making a Section 475 election, consider a 50-minute consultation with us soon.


Traders Should Focus On Q4 Estimated Taxes Due January 18

January 10, 2022 | By: Robert A. Green, CPA | Read it on

Many traders have substantial trading gains for 2021, and they might owe 2021 estimated taxes paid to the IRS quarterly. Unlike wages, taxes aren’t withheld from trading gains. Others can wait to make tax payments until April 18, 2022, when they file their 2021 tax return or extension.

The first three quarterly estimated tax payments were due April 15, June 15, and September 15, 2021, and the quarter four payment is due on January 18, 2022. Many new traders didn’t submit estimated payments for the first three quarters, waiting to see what Q4 brings. Also, some traders view skipping estimated tax payments like a margin loan with interest rates of 3% for Q1 and Q2 2021. With full transparency at year-end, traders can better assess the payment they should make for Q4 payments to minimize their underpayment penalties and interest.

The safe-harbor rule for paying estimated taxes says there’s no penalty for underpayment if the payment equals 90% of the current-year tax bill or 100% of the previous year’s amount (whichever is lower). If your prior-year adjusted gross income (AGI) exceeds $150,000 or $75,000 if married filing separately, then the safe-harbor rate rises to 110%. 

Activity in Jan. 2022 can trigger wash sale losses for 2021, thereby creating more income in 2021.

Suppose your 2020 tax liability was $40,000, and AGI was over $150,000. Assume 2021 taxes will be approximately $100,000, and you haven’t paid estimates going into Q4. Using the safe-harbor rule, you can spread out the payment, submitting $44,000 (110% of $40,000) with a Q4 voucher on January 18, 2022, and paying the balance of $56,000 by April 18, 2022. This is an excellent option to consider instead of sending $90,000 in Q4 (90% of $100,000). Consider setting aside that tax money due April 18, 2022, rather than risking it in the financial markets in Q1 2022. I’ve seen some traders lose their tax money owed and get into trouble with the IRS. (See the example below). 

If your 2020 income tax liability is significantly higher than your 2021 tax liability, consider covering 90% of the current year’s taxes with estimated taxes. Check your state’s estimated tax rules, too.

In the above example, the trader should calculate the underpayment of estimated tax penalties for Q1, Q2, and Q3 on the 2021 Form 2210. Consider using Form 2210’s Annualized Income Installment Method if the trader generated most of his trading income later in the year. The default method on 2210 allocates the annual income to each quarter, respectively.

Learn more about estimated taxes at https://www.irs.gov/businesses/small-businesses-self-employed/estimated-taxes.

A forewarning: The recent market-sell off in January 2022 reminds me of similar circumstances in a few prior years. Here’s an example of what to avoid in 2022. Joe Trader has massive capital gains taxes to pay for 2021. However, due to a market correction in early 2022 and being on the wrong side of many trades, Joe might incur significant capital losses in early 2022 in trading securities (equity options and equities). Unfortunately, Joe might lose much of the tax money he owes the IRS and state for 2021 taxes. Investors will get stuck with a $3,000 capital loss limitation in 2022 and must carry over capital losses to subsequent years. However, Joe is eligible for trader tax status (TTS), so he submits a 2022 Section 475 election to the IRS by April 18, 2022, for ordinary gain or loss treatment with mark-to-market accounting.

With Section 475, Joe’s 2022 trading losses are “ordinary” and offset his other 2022 income, like retirement plan distributions. However, the 2017 TCJA legislation has an “excess business loss” (EBL) limitation in 2022 of $540,00 (married)/$270,00 (other taxpayers). EBL over the limit becomes a net operating loss (NOL) carryforward, which offsets income of any kind in subsequent years. Unfortunately, TCJA doesn’t permit net operating loss (NOL) carrybacks for 2022. Before 2018, traders could carry back massive NOLs to replenish their trading capital and stay in business.

Traders and investors in futures contracts can consider a Section 1256 loss carryback election. Rather than use the 1256 loss in the current year, taxpayers may deduct 1256 losses on amended tax return filings, applied against Section 1256 gains only. It’s a three-year carryback; unused amounts carry forward. TCJA repealed most NOL carrybacks, so the 1256 loss carryback is a trader’s only remaining carryback opportunity.

Star Johnson, CPA, contributed to this blog post.


FIFO vs. Specific Identification Accounting Methods

December 1, 2021 | By: Robert A. Green, CPA | Read it on

By default, the IRS, brokerage firms, and most trade accounting programs use the First-In- First-Out (FIFO) accounting method for securities. If you sell security A, its cost-basis is the first lot purchased — the first one “out” or sold. FIFO suits most active day traders.

But there is another option called the Specific Identification (SI) accounting method. Assume you bought several lots of security A over the year while the stock increased in price. You might prefer to use SI accounting instead of FIFO to specify a higher cost-basis lot to reduce your short-term capital gains for 2021. This enables you to hold the older purchased stock for 12 months at a lower cost-basis for a long-term capital gain taxed at a lower rate (up to 20% for 2021 and 2022).

The IRS requires contemporaneous action for using SI. You must specify the lot to sell before executing the sale, and the broker must confirm those instructions in writing at that same time. You cannot decide to use SI after the sale’s settlement date, like when preparing your tax returns. The IRS provides a little leeway to correct communication errors with the broker by allowing a settlement date rather than a trade date.

FIFO is also widely used for cryptocurrencies. While SI is the default accounting method for intangible property, it’s challenging to operate with cryptocurrencies. See Frequently Asked Questions on Virtual Currency Transactions | Internal Revenue Service (irs.gov)


Don’t Miss The Election For The SALT Cap Workaround

October 5, 2021 | By: Robert A. Green, CPA | Read it on

Many states recently enacted “SALT cap workaround” legislation enabling pass-through entities (PTE) to deduct entity-level SALT payments as a business expense in place of non-deductible itemized deductions over the “SALT cap” of $10,000 per individual tax return. Currently, 20 states have enacted this legislation, and others are considering it.

The SALT cap workaround is not automatic in most states; the owner must file an election for PTE treatment by the deadline, which varies by state. The PTE election deadline for New York State is October 15, 2021. Connecticut’s pass-through entity (PTE) tax for the SALT cap workaround is mandatory, which is unique. In most states, the owner can make the election with a timely filed tax return, which is more convenient.

It’s also essential in most states to pay PTE estimated taxes. For a 2021 business expense deduction on the federal return, make the estimated tax payments before December 31, 2021.

See my updated blog posts on the SALT cap workaround below. As an excerpt, here are some of the updates for NYS and CA.

You can also search “SALT cap workaround” for your state. Several states published FAQs, and many local CPA firms have blog updates about it. 

This alert applies to pass-through entities (PTE), including LLCs, taxed as partnerships or S-Corps. It’s doesn’t apply to sole proprietors. For traders, the PTE must be eligible for trader tax status (TTS).

New York State

NYS Tax Department: New guidance and election application for optional pass-through entity tax (NYS Tax Dept, August 25, 2021) The New York State Tax Department has issued a technical memorandum and webpage to provide information on the new optional PTET.

New York State’s New Pass-Through Entity Tax – The CPA Journal (CPA Journal Aug. 2021)
“Election. To file and pay PTE tax, an eligible partnership or S corporation must make an irrevocable election by the first estimated payment due date, which is March 15 of the calendar year prior to the year in which the PTE tax return is required. The election is made annually and will be effective for the current taxable year. For the 2021 tax year only, an election must be made by October 15, 2021.”

NYS Tax Department: Deadline approaching to opt into pass-through entity tax (PTET) (NYS October 6, 2021)
“To opt-in: Log in to your S corporation’s or partnership’s Business Online Services account. (If the business doesn’t have an account, we recommend creating one by October 8 to avoid missing the election deadline.).”

California

SALT workaround elective pass-through entity tax (Spidell’s California Minute July 18, 2021)

Pass-through entity tax FAQs released by FTB (Spidell September 30, 2021)
“The FTB anticipates releasing the new pass-through entity tax voucher before December 2021. That voucher will provide instructions on how to make the elective tax payment going forward. Note that for federal purposes, the entities will only benefit from the reduction of net income on the 2021 K-1s if the payment is made before the end of the entity’s 2021 taxable year.”

Help with pass-through entity elective tax FAQs (FTB)
“A qualified entity must make the election on its original, timely filed return.” That means the 2021 PTE return due to be filed in 2022.

Other blog posts:

How to Deduct State and Local Taxes Above SALT Cap

Unlock State & Local Tax Deductions With A SALT Cap Workaround. See updates by state.


How to Deduct State and Local Taxes Above SALT Cap

August 3, 2021 | By: Robert A. Green, CPA | Read it on

Updates: As states progress on SALT cap workaround legislation, I update that news at the bottom of my prior post: Unlock State & Local Tax Deductions With A SALT Cap Workaround.

Are you disenfranchised from state and local tax deductions because you exceed the SALT cap of $10,000 per year? 

Organizing an LLC for your business can convert non-deductible SALT into a business expense. Seventeen states have enacted SALT cap workaround laws, and several others are working towards enactment. IRS Notice 2020-75, issued on Nov. 9, 2020, gave the green light to these state laws. Most states drafted their rules to comply with this notice. 

These state laws seem to include a trading business eligible for trader tax status (TTS) but not investment companies. (The reason: TTS entities have business expense treatment, whereas investment companies have suspended investment expenses.)

The states that have enacted SALT cap workaround laws with the effective date:

There is pending legislation in Illinois, Massachusetts, Michigan, North Carolina, Oregon, and Pennsylvania. (Most have passed, see updates).

These SALT cap workaround laws don’t significantly impact state revenues and incentivize entrepreneurs to remain in their state. Even if Congress repeals or revises the SALT limitation, the SALT cap workaround is the better option since you can deduct business expenses from gross income versus itemized deductions subject to an AMT limitation.

California’s new law automatically repeals its SALT cap workaround if Congress repeals the SALT cap limitation. For details on California and several other state laws, see ongoing updates to my June 22, 2021 blog post, Unlock State & Local Tax Deductions With A SALT Cap Workaround. Also, the podcast SALT workaround elective pass-through entity tax (Spidell’s California Minute, July 18, 2021) is an excellent listen for California residents.

TTS traders have other compelling reasons to consider an LLC partnership or S-Corp. 

  • A new LLC taxed as a partnership or S-Corp (pass-through entity PTE) can elect Section 475 MTM within 75 days of inception. That comes in handy since the individual sole proprietor deadline for a 475 election has passed. Section 475 provides tax-loss insurance through its exemption from wash sales and the capital loss limitation. Also, it offers a chance to get a 20% qualified business income (QBI) deduction on TTS/475 net income. 
  • An LLC taxed as an S-Corp unlocks health insurance and retirement plan deductions for TTS traders.

Now more than ever before may be the time to form your TTS entity, but you need to act quickly. Trading in an entity brokerage account for at least all Q4 2021 will help you qualify for TTS. The entity can only pay SALT business expenses on the entity income.

Many states require an election, some by partner, and SALT PTE tax payments have due dates. Dig into the details of your state, and we can help. Don’t miss the boat!

Darren Neuschwander, CPA, contributed to this blog post.


How Some Traders Double-Up On Retirement Plan Contributions

June 23, 2021 | By: Robert A. Green, CPA | Read it on

Profitable traders are keen on maximizing retirement plan contributions in trading activities and also in their full-time jobs. Traders are pros at investing, and they understand the power of tax-free compounding while saving for retirement. However, wages are required to make contributions to a retirement plan.  Active traders eligible for trader tax status (TTS) can use an S-Corp structure to pay themselves the necessary wages.

Those who have a job in addition to trading can double their retirement savings by maximizing their employer 401(k) and contributing another $58,000 to an unaffiliated TTS S-Corp Solo 401(k) or profit-sharing plan.

The TTS S-Corp pays officer compensation, which engineers the earned income required for employee benefit tax deductions, including health insurance premiums and retirement plan contributions. Conversely, trading gains from capital gains or Section 475 ordinary income are considered unearned income, for which the IRS does not permit retirement plan contributions.

An individual TTS trader deducts business expenses on Schedule C. However, a sole proprietor TTS trader cannot arrange AGI deductions for health insurance premiums and retirement plan contributions because underlying trading gains are not self-employment income (SEI) or earned income. A sole proprietor of any kind cannot pay himself payroll (salaries). It’s also tricky for a TTS partnership to create SEI since partnership compensation and other expenses reduce it. Whereas S-Corp payments do not reduce SEI, making the S-Corp the structure of choice for TTS traders for arranging employee benefits.

In the examples below, full-time Trader A contributes the $64,500 cap to a Solo 401(k) retirement plan for 2021. Part-time Trader B doubles up on retirement benefits, maximizing an unaffiliated employer 401(k) plan for $19,500 and contributing up to the $58,000 cap in her TTS S-Corp profit-sharing plan. Unfortunately, part-time Trader C is out of luck; his consulting company is affiliated with his TTS S-Corp, so he must include consulting company employees in his retirement plan.

Fulltime Trader A
This person owns a single-member LLC (SMLLC) taxed as an S-Corp, eligible for TTS business expense deductions.

In December 2021, based on sufficient annual profits, a TTS S-Corp can pay maximum-required officer compensation of $154,000 to make the Solo 401(k) retirement plan contribution cap of $58,000 ($64,500 for age 50 or older; 2021 limits). Trader A’s Solo 401(k) plan comprises a $19,500 elective deferral, $6,500 catch-up elective deferral for age 50 or older, and a $38,500 profit-sharing contribution for an overall plan limit of $64,500.

Trader A’s W-2 wage statement deducts the Solo 401(k) elective deferral amount of $26,000 from taxable income (box 1), and the S-Corp deducts the profit-sharing contribution of $38,500 on Form 1120-S. The profit-sharing contribution is 100% deductible, but it represents 25% of wages, translating to $38,500 of officer wages (25% of $154,000). The elective deferral of $26,000 is 100%  deductible, and it looks to gross income. If the 401(k) plan only provided for an elective deferral (no profit-sharing contribution), then Trader A would only need wages (net of required deductions) of $26,000 before contribution on a pre-tax basis to the 401(k) (a higher amount may be necessary for a Roth IRA).

Alternatively, if Trader A did not make an elective deferral, the TTS S-Corp could contribute $58,000 to the Solo 401(k) plan on officer wages of $232,000 ($58,000 is 25% of $232,000).

Higher wages trigger an additional Medicare tax of 2.90% (plus a 0.9% Obamacare Medicare surtax over the ACA income threshold). The Medicare tax of 3.8% on earned income (wages) often replaces the 3.8% Obamacare net investment tax for upper-income traders.

If Trader A is married and the spouse provides employment services to the S-Corp, the spouse can also participate in the S-Corp retirement plan. The same goes for working-age children rendering services negotiated at arm’s length.

There’s also an option for a Roth 401(k) (after-tax) plan for the elective deferral portion only. Suppose you are willing to forgo the upfront tax deduction. In that case, you’ll enjoy permanent tax-free status on contributions and growth within the plan — subject to satisfying certain IRS conditions —  and minimum distributions at age 72 are not required.

Of course, W-2 wages are subject to payroll taxes. For 2021, on the Social Security wage base amount of $142,800, 6.2% of Social Security taxes are paid and deducted by the employer, and 6.2% are withheld from the employee’s paycheck. Thus, in most cases, the taxpayer saves more in income taxes than they owe in payroll taxes while at the same time accumulating Social Security benefits for retirement.

Part-time Trader B working for Big Tech
This trader has a full-time job with a Big Tech company earning a W-2 salary of $300,000 per year. Trader B seeks to maximize participation in her employer’s 401(k) retirement plan, with an elective deferral of $19,500 (under age 50), plus an employer matching contribution of 6%, which does not count towards the elective deferral limit.

Trader B also operates a TTS S-Corp and makes $400,000 in capital gains for 2021. In addition to her employer’s 401(k), Trader B wants to utilize a Solo 401(k) retirement plan to maximize her savings.

The critical issue is whether Trader B’s TTS S-Corp is affiliated with her employer. Assuming it is unaffiliated, Trader B can maximize multiple employer retirement plans, with an essential restriction: An individual can only defer the limit ($19,500 plus $6,500 catch-up, if over 50) regardless of the number of plans. So, Trader B skips the elective deferral in her Solo 401(k) and makes a $58,000 (2021 limit) profit-sharing contribution to her Solo 401(k) plan or contributes to a SEP IRA. Trader B would need $232,000 in wages to maximize the profit-sharing contribution of $58,000 ($232,000 divided by a 25% rate for an S-Corp). Trader B’s TTS S-Corp shows a net profit after deducting officer compensation and the retirement plan contribution. (See Retirement Topics – 401(k) and Profit-Sharing Plan Contribution Limits.)

When a taxpayer receives wages from more than one employer, there might be duplicate Social Security taxes for the employer share if over the Social Security wage base amount. The individual tax return identifies excess employee Social Security taxes and reclassifies them as a federal tax credit, avoiding redundancy on the employee share.

Part-time Trader C with an Affiliated Company
This trader owns 100% of a consulting business S-Corp with 10 full-time employees. The consulting S-Corp does not offer a retirement plan to its employees. Trader C wonders if the TTS S-Corp can establish a Solo 401(k) plan and deny participation by consulting business employees. The answer is no because these two employers are affiliated.

The controlled group non-discrimination rules prevent an owner from discriminating against his employees by excluding them from retirement benefits. It is wise to consult an employee benefits attorney about vesting and other means to work within the constraints of the non-discrimination, controlled group, and affiliated service group rules. 

Q&A with Employee-benefits Attorneys    

I asked the following questions to employee-benefits attorneys Rick Matta, David Levine, and Joanne Jacobson of Groom Law Group.

  1. Do you agree with the retirement plan strategy for full-time Trader A?

    Yes, with the caveat that a TTS trader must have earned income (W-2 wages) for this retirement plan strategy. 

  2. Can Trader B maximize her Big Tech employer’s 401(k) plan while contributing the maximum allowed $58,000 to a TTS S-Corp profit-sharing plan for 2021?

    Yes, as long as the two employers are unaffiliated. Multiple employers can have various retirement plans, but a taxpayer is limited to one 401(k) elective deferral limit.

  3. If Trader B only contributes $10,000 to his Big Tech employer’s 401(k), can he contribute the remaining $9,500 to a TTS S-Corp Solo 401(k)? If yes, is there a formal integration required?

    Yes, the $19,500 / $26,000 limit is based on the individual across all plans in which he or she participates. Therefore, coordination of these limits across plans is required.

  4. Do you agree that Trader C’s consulting S-Corp is affiliated with his TTS S-Corp? How does affiliation restrict Trader C?

    From the facts presented, it appears that they are affiliated, and the IRS non-discrimination rules could limit the amounts Trade C could save for retirement.  However, it is essential to keep in mind that there are many ways that “affiliation” can occur. For example, it can be due to common ownership (commonly called “controlled group”), sharing of services (commonly called “affiliated service group”), or even common governance or control (especially for non-profits). Therefore, a careful review of each structure is vital to avoid potentially costly failures.

  5. Do you recommend that Traders A, B, and C also consider a nondeductible IRA if they are not eligible for deductible IRA contributions?

    Nondeductible IRAs are always on our list to consider when speaking with TTS traders with earned income. 

  6. Do you support converting IRAs and 401(k) rollovers to Roth IRAs?

    These types of IRAs – called “back door Roth IRAs” by some in the industry – are popular planning tools.  While each individual’s tax planning varies, they are often seen as advantageous.  We also note that there are in-plan Roth conversion opportunities in 401(k) plans that can have other benefits that can be worth considering.

  7. Are defined benefit plans appropriate for upper-income TTS traders? Defined benefit plans – when carefully designed – can provide significant tax-advantaged savings vehicles and are almost always worth consideration.

Many of our TTS trader clients operate in an S-Corp, and they select a Solo 401(k) retirement plan and execute the strategy through year-end payroll. Adding a traditional IRA, Roth IRA, or nondeductible IRA contribution by April 15 tax time is generally a good idea, too.

Consider consulting with an employee benefits attorney to discuss multiple employer retirement plans, affiliate service group rules, defined benefit plans, and back door Roth strategies.

Contributions by Adam Manning, CPA, and Groom Law attorneys Rick Matta, David Levine, and Joanne Jacobson.


Unlock State & Local Tax Deductions With A SALT Cap Workaround

June 22, 2021 | By: Robert A. Green, CPA | Read it on

Updates: As states progress on SALT cap workaround legislation, I will update that news at the bottom of this post. Also, see my August 3, 2021 blog post, How to Deduct State and Local Taxes Above SALT Cap.

Since 2018, taxpayers living in high-tax states have been unable to take an itemized deduction of state and local taxes over a limitation (known as the “SALT” cap) of $10,000 per year. This limitation came from the 2017 Tax Cuts and Jobs Act (TCJA) and is effective for tax years 2018 through 2025. But the good news is that some states have a workaround, which I cover in this post.

On Nov. 9, 2020, Treasury and the IRS issued Notice 2020-75, which says they “intend to issue proposed regulations to clarify that State and local income taxes imposed on and paid by a partnership or an S corporation on its income are allowed as a deduction by the partnership or S corporation in computing its non-separately stated taxable income or loss for the taxable year of payment.”

The Workaround
To date, state laws for SALT cap workarounds vary, but the general idea is that a pass-through entity (PTE) assesses a tax at the state’s rate on individuals. The state then grants the respective owners of the PTE a tax credit on their state personal income tax return. The SALT cap only applies to individual taxes, not PTE entity-level taxes. Other states subject the PTE to an entity-level tax and then exclude that respective PTE income from the owner’s state tax return.

Check the latest news in your state to see if your state has enacted a SALT cap workaround when the tax law is effective (i.e., 2021 or 2022) and how it works. For example, Connecticut made the PTE tax mandatory for the SALT cap workaround strategy. Most of the other states make it elective, giving the taxpayer more choices; however, don’t miss the election deadline. Consult your tax advisor to see how this strategy might save you money and whether you should consider forming a pass-through entity soon in 2021.

Traders seem to qualify for the SALT cap workaround
Many traders eligible for trader tax status (TTS) already use a PTE like a spousal-member LLC/partnership or single-member LLC/S-Corp. TTS traders need an S-Corp to pay officer compensation to unlock health insurance and retirement plan deductions, which otherwise are not allowed on trading gains that are unearned income.

A TTS trader in securities, commodities, and other financial products, has business expense treatment. A TTS trader actively buys and sells capital assets with capital gains and losses, or Section 475 ordinary gains and losses, if elected on a timely basis.

Here’s an example: In 2021, Joe Trader pays $35,000 of state income taxes on the S-Corp level using a SALT cap workaround. His S-Corp net income is $500,000, subject to a state tax rate of 7%. Joe reaches his SALT cap of $10,000 with real estate taxes of $11,000, so he loses a $1,000 deduction. Joe deducts $35,000 of the S-Corp state taxes from his gross income saving $12,950 in federal taxes ($35,000 state tax deduction x 37% top marginal federal tax rate). Without a SALT cap workaround, Joe would have $36,000 of non-deductible SALT.

Next steps
Many accountants had taken a wait-and-see approach on SALT cap workaround strategies since IRS approval was uncertain before the November 2020 IRS notice mentioned above. In addition, the IRS and Treasury previously rejected recharacterizing SALT payments as charitable contributions, which a few states attempted.

This PTE tax approach is not foreign; some southeastern states use PTE composite returns to assess tax on non-resident owners. 

Some tax pundits expected the Biden administration to repeal the SALT cap. However, President Biden’s FY 2022 budget and recent infrastructure bills do not include the reversal of the SALT cap. Congressional Republicans are resistant to undermine TCJA. Some Congressional Democrats stated they might not support Biden’s infrastructure bills unless they fix the SALT cap. Stay tuned!

The PTE tax might be a better solution than pre-TCJA law when SALT was an itemized deduction and a preference for alternative minimum tax (AMT).

Updated news by state below

IRS Signals Approval of Entity-Level SALT Cap Workaround, But States Should Still Think Twice (Tax Foundation Nov. 11, 2020)
“Treasury and IRS signaled their intention to bless one type of state workaround for the $10,000 State and Local Tax (SALT) deduction cap: entity-level taxes that allow owners of pass-through businesses to pay an additional state tax at the business level, with an offsetting credit against their individual income tax liability. Since the SALT deduction cap does not apply to business taxes, this functionally allows these owners to avoid the cap, since the entity-level tax substitutes for their income tax payment, which would have been subject to a capped deduction.”

“Connecticut, Louisiana, Maryland, New Jersey, Oklahoma, Rhode Island, and Wisconsin have all adopted entity-level taxes which offer credits against the owners’ personal tax liability. In Connecticut, the entity-level tax is mandatory. In the other six states, it is elective; business owners can choose to pay it and claim the credit, or may decline if it is not in their best interest to go that route.”

New Jersey enacts SALT deduction cap workaround (Grant Thorton Feb. 14, 2020)
NJ Bill Would Amend SALT Cap Workaround (Law360 Dec 13, 2021).
“A.B. 6185 would make changes to the credit structure and calculation method of the elective pass-through entity tax. According to the bill, the new way of calculation would allow for a larger credit to be obtained by a payer of the optional tax. The bill would also realign the tax’s brackets to align with the new state tax brackets, the bill said.”

California Lawmakers, Governor Float SALT Cap Workaround Plans (Bloomberg Tax Jan. 14, 2021)
“A new California Senate bill (SB 104) would give pass-throughs—partnerships, limited liability companies, and S corporations—the option to pay an entity-level income tax that would be fully deductible. The bill doesn’t specify a tax rate yet. Individuals who are members of those businesses would exclude the amount the entity pays from their gross income.” (Governor) Newsom’s proposal is narrower, applying only to S corporations. It would give those businesses the option to pay a 13.3% income tax rather than the 1.5% that California currently imposes on S corporations. Shareholders would get a tax credit equal to 13.3% of their passed-through income. Under current California law, an S corporation’s income is also taxable at the shareholder level.”
Calif. Gov. Updates Budget With Tax Rebates, SALT Workaround (Law360 May 14, 2021)
California budget deal reached: More stimulus payments and tax relief (Spidell News June 28, 2021)
“The Governor and legislative leaders announced that they have reached a budget deal. Major tax-related items contained in the deal include an elective passthrough entity tax, which provides a work-around to the $10,000 SALT deduction limitation for owners of passthrough entities…These provisions are contained in draft legislation that has not yet been enacted, although it is anticipated that these bills will be passed within the next week or two.” https://leginfo.legislature.ca.gov/
SALT Cap Workaround, Tax Credit Boosts Go To California Governor (Bloomberg Tax July 1, 2021)
“A California workaround to the $10,000 federal cap on state and local tax deductions, expanded tax credits, and new grants for businesses are included in bills lawmakers sent Thursday to Gov. Gavin Newsom (D). Tax policy changes in a bill lawmakers passed Thursday (A.B. 150) include a workaround for the $10,000 cap on state and local tax deductions for S corporations and their shareholders. The corporations could pay 9.3% income tax rather than the 1.5% rate California currently imposes. Shareholders would get a tax credit equal to 9.3% of their passed-through income. The workaround would be in effect for taxable years 2021 through 2025 and taxpayers would have to use the option on original, timely filed tax returns.
Calif. Joins States With SALT Cap Workaround (Law360 July 16, 2021)
“Gov. Gavin Newsom, a Democrat, signed A.B. 150… he reiterated his position that the cap on the SALT deduction should be lifted but said California would provide “a partial fix” for S corporations and other pass-throughs. California’s SALT workaround for pass-through entities will be an elective tax that the entity pays on behalf of partners. The partners can then receive a credit. The tax rate will be 9.3% and will fall on the distributive shares of income of the partners. Individual partners can choose not to consent, but the entity can still elect to pay the tax. Those partners who do consent will get a nonrefundable credit that equals the amount of tax paid by the entity on the partners’ behalf. The pass-through workaround will begin for tax year 2021 and sunset after tax year 2025, according to the analysis.”
SALT workaround elective passthrough entity tax (Spidell’s California Minute July 18, 2021)
Passthrough entity tax FAQs released by FTB (Spidell Sept. 30, 2021)
“The FTB anticipates releasing the new passthrough entity tax voucher before December 2021. That voucher will provide instructions on how to make the elective tax payment going forward. Note that for federal purposes, the entities will only benefit from the reduction of net income on the 2021 K-1s if the payment is made before the end of the entity’s 2021 taxable year.”
Help with pass-through entity elective tax FAQs (FTB)
“A qualified entity must make the election on its original, timely filed return.”

New York Includes SALT Cap Workaround in Budget Deal (Bloomberg April 6, 2021)
“The deal between New York Gov. Andrew Cuomo (D) and Democratic legislative leaders, announced Tuesday, would allow pass-through businesses to pay taxes at the entity level. The entity-level tax would be offset by a corresponding individual income tax credit.”
New York Governor Signs Bill That Could Provide Pass-Through Entities a SALT Deduction Cap Workaround (NYSSCPA April 10, 2021)
New York State Budget Provides A Work Around To The Federal SALT Cap For Certain Business Entities (Forbes May 27, 2021)
SALT Cap Workaround Rules Due Soon From New York Tax Department (Bloomberg Tax Aug. 19, 2021)
“New York business owners hankering to seize on a fresh tax break may get guidance from the state’s tax department as early as next week, according to a source familiar with the matter.”
NYS Tax Department: New guidance and election application for optional pass-through entity tax (NYS Tax Dept, Aug. 25, 2021) The New York State Tax Department has issued a technical memorandum and webpage to provide information on the new optional PTET.
New York State’s New Pass-Through Entity Tax – The CPA Journal (CPA Journal Aug. 2021)
“Election. To file and pay PTE tax, an eligible partnership or S corporation must make an irrevocable election by the first estimated payment due date, which is March 15 of the calendar year prior to the year in which the PTE tax return is required. The election is made annually and will be effective for the current taxable year. For the 2021 tax year only, an election must be made by October 15, 2021.
New York Pass Through Entity Tax Update & How to Actually Make the Election (linkedin.com) (Sept. 21, 2021)
New York’s Passthrough Entity Tax (CliftonLarsonAllen LLP Sept. 30, 2021). 
“Only an authorized person, as defined, may make this election on behalf of an eligible S corporation or partnership. The PTET election application can be filed electronically by creating a business online services account with the New York State Department of Taxation and Finance.

Alabama Lawmakers Advance Changes to SALT Cap Workaround (Tax Notes April 15, 2021)
Ala. Floats Rule For SALT Cap Workaround (Law360 Sept. 1, 2021)
“The rule, published in Tuesday’s state register, would provide that required annual payments are the lesser of 100% of the tax shown for the taxable year or 100% of the tax shown for the preceding year. The proposed rule also provides that while an entity is transitioning to being taxed at the entity level, required estimated quarterly payments will be 25% of the required annual payment.”

La. Senate Approves SALT Cap Workaround For Pass-Throughs (Law360 May 23, 2021)

SALT Workarounds Spread to More States as Democrats Seek Repeal (Bloomberg Tax April 27, 2021)
“Seven states, including California and Illinois, are poised to join nearly a dozen others like New York and New Jersey that have skirted around the federal cap on state and local tax deductions as the prospect of a federal fix remains elusive. New York and Idaho both recently passed legislation to work around the controversial 2017 tax law feature known as the SALT cap. Georgia and Arizona are awaiting their governors’ approvals of similar SALT cap workarounds, and lawmakers in California, Massachusetts, Illinois, North Carolina, and South Carolina are debating bills of the same nature.” (See the state map of states included in the workaround.)

Massachusetts Lawmakers Push SALT Cap Workaround in Budget (Bloomberg Tax May 11, 2021)
Mass. Senate OKs Budget With Child Credit, SALT Workaround (Law360 June 2, 2021)
“The pass-through provision is similar to other entity-level taxes that states have either enacted or are considering as a workaround to the $10,000 state and local tax deduction cap. The pass-through entity-level tax provisions would take effect for taxable years beginning on and after Jan. 1, 2021.”
Mass. Legislators Pass Budget With SALT Workaround, Credits (Law360 July 9, 2021)
“The Massachusetts Legislature unanimously passed a fiscal year 2022 budget Friday that would establish an entity-level tax for pass-through businesses…would allow an entity-level tax on pass-throughs and provide a credit against a member’s share of that tax.”
Mass. Gov.’s Budget Creates Tax Credits, Vetoes Deduction Delay (Law360 July 19, 2021)
“Republican Gov. Charlie Baker on Friday signed the budget bill while returning to the Legislature a provision that would allow an entity-level tax on pass-throughs and provide a credit against a member’s share of that tax, asking it to increase the credit portion. Baker returned the pass-through provision to the state Legislature with proposed amendments that would increase a member’s credit from 90% of their share in the entity’s tax to 100% of their tax share, saying that taxpayers should collect the full benefit as struggling businesses emerge from the pandemic. The pass-through entity-level tax provisions will take effect for taxable years beginning on and after Jan. 1, 2021.”
Massachusetts Lawmakers Override Governor on SALT Cap Fix (1) (Bloomberg Tax July 29, 2021)
“Both the governor and lawmakers agreed to a SALT cap fix that would allow individuals to get around the $10,000 deduction limit by having pass-through entities they are members of, like S corporations, pay the 5% state excise tax, instead of having income flow to individual members for taxation. The lawmakers’ measure, however, would allow the individual members a credit equal to the share of state taxes owed, multiplied by 0.9. This would bring in $90 million annually to the state, they estimate. Baker had wanted a 100% credit for individual members.” 
Capital gains and Section 475 ordinary income is taxed at the 12% rate. 

SC Offers SALT Cap Workaround Through Entity-Level Tax (Law360 May 19, 2021)
“Republican Gov. Henry McMaster signed S.B. 627 on Monday, allowing partnerships and S corporations to make an annual election to pay a 3% tax at the entity level while offering a corresponding income exclusion for owners and partners. The bill will take effect starting in tax year 2021.”
SC Issues Guidance On SALT Cap Workaround (Law360 Dec 3, 2021).
“The owners of pass-through entities that elect to pay tax at the entity level on income apportioned to South Carolina will have that income excluded from their state taxable income, the state Department of Revenue said in a ruling Friday.”

Illinois Assembly Approves SALT Workarounds for Partnerships (Bloomberg Tax May 31, 2021)
Illinois Enacts SALT Cap Workaround for Pass-Through Businesses  (Bloomberg Tax Aug. 27, 2021)
Gov. “Pritzker signed S.B. 2531, which allows partnerships and S corporations to pay their income tax at the entity-level rate of 4.95% and then claim a credit on their state return.” The annual election is irrevocable and the tax benefit is available for tax years ending on or after Dec. 31, 2021, and before Jan. 1, 2026.
Ill. Offers Estimated Payment Penalty Relief For Entity-Level Tax (Law30 Sept. 9, 2021)
“Illinois will waive penalties for late estimated payments for the state’s new entity-level tax that acts as a workaround to the federal cap on state and local tax deductions, the state Department of Revenue announced Thursday.”

SALT Workaround for Pass-Throughs Advances to Michigan Governor (Bloomberg Tax June 23, 2021)
“The SALT cap workaround bill (H.B. 4288) could provide roughly $190 million in federal tax relief for Michigan businesses without costing the state a dime, according to a legislative fiscal statement. The measure would let pass-through businesses pay state and local taxes at the entity level starting in tax year 2021, allowing the full deduction of these taxes on federal returns instead of limiting the deduction amount the entity owners can currently claim on their flow-through income.”
Mich. Gov. Vetoes SALT Deduction Cap Workaround Bill (Law360, July 14, 2021).
Michigan’s governor vetoed a bill seeking to create an entity-level tax for pass-through businesses to sidestep the federal cap on state and local tax deductions, saying the bill’s $5 million cost to implement should be part of broader budget negotiations.
Mich. Lawmakers OK Budget Funding SALT Cap Workaround (Law360 Sept. 23, 2021)
“Michigan lawmakers approved a nearly $70 billion budget that includes funding necessary to implement a state and local tax deduction cap workaround for pass-throughs that the governor previously vetoed due to reservations about the program’s cost.”
Michigan Budget Funds SALT Cap Workaround (Law360 Sept. 29, 2021)
“Michigan Gov. Gretchen Whitmer signed the state’s budget Wednesday, including a provision with funding necessary to implement a state and local tax deduction cap workaround for pass-throughs that she previously vetoed due to reservations about the program’s cost.”
Mich. House Fast-Tracks Refiled SALT Cap Workaround Bill (Law360 Oct. 7, 2021)
“Michigan lawmakers moved quickly Thursday to allow a vote on a refiled entity-level tax bill to sidestep the $10,000 federal cap on state and local tax deductions, following the governor’s pledge to support the program after its funding was secured.”
Michigan House Passes Refiled SALT Cap Workaround Bill (Law360 Oct. 14, 2021).
“Michigan’s House of Representatives passed legislation Thursday that would offer an entity-level tax permitting pass-through businesses to sidestep the $10,000 federal cap on state and local tax deductions — a program for which the state’s budget specifically earmarked funding.”
Michigan Lawmakers OK SALT Cap Workaround (Law360Dec 15, 2021).
“Pass-through businesses in Michigan could sidestep the federal cap on state and local tax deductions under a bill headed to the governor’s desk.”

Democrats consider ‘SALT’ relief for state and local tax deductions (NBC News June 24, 2021)

Georgia Enacts Salt Cap Workaround For Tax Years Starting In 2022 (Windham Brannon)
House Bill 149, which was signed into law, creates a SALT cap workaround for Georgia partnerships and subchapter S corporations.”

Maryland’s SALT Workaround: Impacts and Planning Opportunities (March 12, 2021)

Rhode Island Budgets For Salt Workaround (Aug. 2019)

Wisconsin enacts SALT deduction workaround with pass-through tax (Dec. 17, 2018)

IRS Provides Clarity Regarding Oklahoma’s Salt Cap Workaround (March 3, 2021)

North Carolina Republicans Introduce SALT Cap Workaround (Tax Notes April 8, 2021)
NC House OKs Budget With Tax Cuts, SALT Cap Workaround (Law 360 Aug. 13, 2021)
“Democratic Gov. Roy Cooper opposes H.B. 334.”

Ore. Senate OKs Trimming Biz Tax Break, SALT Workaround (Law360, June 17, 2021)
“Under S.B. 727, the state would create an elective entity-level tax on qualifying pass-through entities. The tax rate would be 9% for the first $250,000 of income and 9.9% for income above $250,000. If an entity elects to pay the tax, the owners would be allowed an offsetting tax credit to claim on their personal income tax returns.”

Colo. Lawmakers OK Entity-Level Taxation To Skirt SALT Cap (Law360, June 9, 2021)
“Under the bill, the state would allow pass-through entities to elect to pay an entity-level tax for income tax years beginning on or after Jan. 1, 2022. The entity-level tax rate would be 4.55%, the same as the state’s flat income tax rate.”
Colo. Limits Tax Breaks, OKs SALT Workaround In Tax Overhaul (Law360, June 24, 2021)
Gov. signed “H.B. 1327 provides for the entity-level tax to circumvent the $10,000 SALT cap.”

Pa. Bill Seeks Entity-Level Tax To Bypass SALT Deduction Cap (Law360 June 29, 2021)
“H.B. 1709, introduced Monday by Rep. Martina A. White, R-Philadelphia, would allow partnerships and S corporations to elect to be taxed at the entity level while providing an offsetting credit to owners and shareholders.”

Arizona House Panel OKs Entity-Level Tax To Skirt SALT Cap (Law360 Feb. 18, 2021)
Ariz. Adopts High-Earner Tax Bypass, SALT Cap Workaround  (Law360 July 12, 2021)
“Arizona will create an alternative business income tax and an entity-level tax, bypassing both a state income tax surcharge on high earners and the federal cap on state and local tax deductions under two bills signed by the governor. H.B. 2838 will allow partnerships and S corporations to elect to pay a 4.5% tax at the entity level and offer a credit to the entity’s partners, members or shareholders for their pro rata share of the tax, according to a bill analysis. The entity-level tax election will be available only if all of an entity’s members, partners or shareholders are Arizona residents. The bill will take effect on Jan. 1, 2022, and the credit is allowed to be carried forward for up to five consecutive years.”

A Closer Look at Minnesota’s Proposed SALT Cap Workaround (Minnesota Center for Fiscal Excellence)
Minn. To Offer SALT Cap Workaround, PPP Loan Tax Relief (Law360 July 1, 2021)
“Democratic Gov. Tim Walz signed into law H.B. 9. The law creates an entity-level tax for pass-through entities with a refundable credit for entity members, allowing them to bypass the $10,000 state and local tax cap…starting tax year 2021”

Ark. Bill Floats SALT Cap Workaround With Pass-Through Tax (Law360 Jan. 20, 2021)

Some states now offer certain business owners a workaround for cap on state and local tax deduction (CNBC July 22, 2021)

Sens. Endorse Easing SALT Cap, Killing ARPA Tax Cut Limits (Law360 Aug. 11, 2021)
“Under the budget resolution Democrats advanced early Wednesday, a priority for the Senate Finance Committee would be “SALT cap relief.” No definition of relief or other detail is provided… Sen. Chuck Grassley, R-Iowa, offered an amendment to the budget resolution to leave the SALT cap untouched, calling the SALT deduction a provision “that mainly benefits the wealthy.” However, the amendment failed 48-51.”

California Drivers And Ohio Musicians: SALT In Review (Law360 Sept. 3, 2021)
“The good folks at the Institute on Taxation and Economic Policy released a report on potential changes to the SALT deduction limits. ITEP looked at several scenarios:”

NJ Dem Reps Say No SALT Cap Repeal, No Reconciliation (Law360 Sept. 20, 2021)
“A group of New Jersey congressional Democrats said Monday that they will vote against a proposed $3.5 trillion reconciliation bill unless the federal deduction for state and local taxes is fully restored.”

Entity-Level Taxes Grow, But Future Uncertain, Tax Atty Says (Law360 Sept. 23, 2021)
“Although 20 states have adopted pass-through taxes at the entity level as a workaround to the $10,000 cap on the federal deduction for state and local taxes paid, these regimes face a highly uncertain future, a tax professional said Thursday. This month, Democrats on the House Ways and Means Committee released a preliminary $2.9 trillion package of tax increases that left out a repeal of the SALT cap. But House Ways and Means Chairman Richard E. Neal, D-Mass, and Ways and Means members Rep. Bill Pascrell, D-N.J. and Rep. Tom Suozzi, D-N.Y., said afterward that although the measure was left out, they were committed to enacting a law “that will include meaningful SALT relief.”

2nd Circ. Rejects States’ Challenge To Fed. SALT Cap (Law360 Oct. 5, 2021)
“The federal $10,000 deduction cap on state and local taxes is constitutional, the Second Circuit said Tuesday, finding a challenge to the limitation by Maryland, New York, New Jersey and Connecticut…”

SALT-Cap Relief Faces Rollback as Democrats Eye Less Spending (Bloomberg Tax Oct. 4, 2021)
“Democrats risk settling for a less generous expansion of the state and local tax deduction than previously hoped after President Joe Biden conceded that lawmakers will have to scale back his economic agenda to get it enacted.”

Ohio Bill Seeks Entity-Level Tax To Bypass SALT Cap (Law360 Oct. 6, 2021)
“Under the (proposed) bill, entities that elect to be taxed at the entity level would have to make separate, irrevocable elections each tax year, starting in the entity’s tax year that begins in 2022. The tax rate would be 5% for 2022 and would then be the rate on taxable business income, currently 3%, for later years.”

Darren L. Neuschwander, CPA, contributed to this blog post. 

 

 

 

 

 

 

 

 

 

 

 

 

 


The American Rescue Plan Act of 2021 Impacts Traders

June 21, 2021 | By: Robert A. Green, CPA

On March 11, 2021, Congress and President Biden enacted “The American Rescue Plan Act of 2021” (ARP). In this post, I focus on the provisions that could impact traders, including recovery rebates for individuals, EBL extension, child tax credit, loan forgiveness, and more. The quotations included under each topic are from the “American Rescue Plan Act Roadmap” published by Bloomberg Tax & Accounting.

Many of the ARP tax benefits are subject to income thresholds. Traders have widely fluctuating income and losses from year to year, and they might qualify for some of these tax benefits. ARP includes business and health care benefits, but most don’t apply to solo TTS traders.

2021 Recovery Rebates to Individuals

“Provides a $1,400 refundable tax credit to individuals ($2,800 for joint filers) with up to $75,000 in adjusted gross income (or $112,500 for heads of household and $150,000 for married couples filing jointly). Provides $1,400 for dependents (both child and non-child). The credit will be phased out entirely for those with incomes above $80,000 (or $120,000 for heads of household and $160,000 for married couples filing jointly). The credit is reduced between $75,000 and $80,000 (or $112,500 and $120,000 for heads of household and $150,000 and $160,000 for married couples filing jointly).”

Extension of Limitation on Excess Business Losses (EBL)

A trader eligible for trader tax status (TTS) using a Section 475 election for ordinary loss treatment might exceed the EBL threshold. The excess is a net operating loss (NOL) carry forward. The original 2018 EBL threshold was $500,000/$250,000 married/other taxpayers, and it’s adjusted for inflation.

“Extends for an additional year (through 2026) the denial of a current-year deduction for business losses of a noncorporate taxpayer to the extent they exceed business income plus a threshold amount.”

Suspension of Income Tax on Portion of Unemployment Compensation

Many traders collected unemployment compensation in 2020, as they lost their jobs during the Covid pandemic. Some commenced a TTS trading activity after the Covid crash in March 2020; it’s important to note trading gains do not conflict with unemployment insurance benefits. A TTS S-Corp with officer compensation, however, does conflict with unemployment benefits.

“For 2020, excludes from gross income up to $10,200 of unemployment compensation received for individuals with adjusted gross income of less than $150,000.”

Child Tax Credit

“Increases the child tax credit amount for 2021 only, to $3,600 for children under 6, and to $3,000 for children ages 6 to 17; expands definition of ‘qualifying child’ to include 17-year-olds.”

Credits for Paid Sick and Family Leave for Certain Self-Employed Individuals

“Extends the refundable paid sick time and paid family leave credits established by the Families First Coronavirus Response Act through September 30, 2021. For purposes of the family leave credit, between April 1, 2021, and September 30, 2021, eligible wages are increased to $12,000 from $10,000. Extends eligibility to additional self-employed workers.”

Student Loan Forgiveness

“For eligible student loans discharged in 2021-2025, the discharged amounts are excluded from income. The exclusion from income does not apply to the discharge of a loan made by certain lenders if the discharge is on account of services performed for the lender.”

Links

FACT SHEET: The American Rescue Plan Will Deliver Immediate Economic Relief to Families (U.S. Department of the Treasury, March 18, 2021)

The American Rescue Plan (Whitehouse.Gov). Consumer-friendly approach. 

Tax provisions in the American Rescue Plan Act (Journal of Accountancy, Feb. 27, 2021)

 

The IRS postponed the 2020 individual tax deadline to May 17

April 6, 2021 | By: Robert A. Green, CPA

The IRS postponed the 2020 individual tax filing and payment deadline to May 17, 2021, including the 2021 Section 475 election. For Texas, Oklahoma, and Louisiana residents, the deadlines are June 15, 2021. 

April 13, 2021: The IRS continues to assert that 2021 first quarter estimated tax payments are due April 15, even though they postponed the 2020 individual tax filing and payment deadline to May 17, 2021. See IRS notice Electing To Apply a 2020 Return Overpayment From a May 17 Payment with Extension Request to 2021 Estimated Taxes

March 29, 2021: The good news is the individual Section 475 election is due May 17, 2021, with the 2020 tax return or extension. The IRS issued formal guidance Notice 2021-21, “Relief For Form 1040 Filers Affected By Ongoing Coronavirus Disease 2019 Pandemic.” The IRS notice states, “Finally, elections that are made or required to be made on a timely filed Form 1040 series (or attachment to such form) will be timely made if filed on such form or attachment, as appropriate, on or before May 17, 2021.” The IRS notice also postponed the 2020 IRA and HSA contribution tax deadline to May 17, 2021.

March 17, 2021: Tax Day for individuals extended to May 17: Treasury, IRS extend filing and payment deadline. “The Treasury Department and Internal Revenue Service announced today that the federal income tax filing due date for individuals for the 2020 tax year will be automatically extended from April 15, 2021, to May 17, 2021. The IRS will be providing formal guidance in the coming days. Individual taxpayers can also postpone federal income tax payments for the 2020 tax year due on April 15, 2021, to May 17, 2021, without penalties and interest, regardless of the amount owed. This relief does not apply to (2021) estimated tax payments that are due on April 15, 2021. The IRS urges taxpayers to check with their state tax agencies for those details.” (IRS Issue Number: IR-2021-59). Intuit: State Tax Deadline Updates. The postponement does not apply to C-Corps, trusts, and estates.

Feb. 22, 2021: For residents of Texas, Oklahoma, and Louisiana, the IRS postponed the April 15, 2021 tax filing and payment deadline until June 15, 2021, after a federal disaster declaration in February 2021 due to winter storms. It also extended the 2021 Q1 estimated income tax payment deadline from April 15 to June 15, 2021. The delay includes various 2020 business returns due on March 15, including partnerships and S-Corps. The postponement also applies to the 2021 Section 475 election for individuals and pass-through entities in these three states.