Traders have unique tax issues on state and local income tax returns for business entities and individuals. Moreover, state and local tax regimes vary significantly. The preferred business entity for a trader is an S-Corp pass-through entity, which is free of entity-level federal taxation. Some states and cities subject S-Corps to taxation. (Read our recent blog post: A Few States Tax S-Corps: Traders Can Reduce It.)

In my five-part series “Trader Tax Battle Of The States,” I focus on state and local tax systems for S-Corps, LLCs, and partnerships. I mention basic information about individual income tax, estate and inheritance tax regimes. The numbers listed below are the states ranking by population.

35. Nevada:

NV enacted a Commerce Tax (CT), and the first fiscal year-end for this new tax regime is June 30, 2016. Per the CT sites below, “CT is imposed on businesses with a Nevada gross revenue (GR) exceeding $4,000,000 in the taxable year.” There are two exemptions applicable to a trading or investment company:

– “Passive entities are exempt if 90% of income is portfolio income, including capital gains from the sale of real property, gains from the sale of commodities traded on a commodities exchange and gains from the sale of securities.”

– Also exempt: “Intangible investments entity if it only owns and manages intangible investments, such as investments in other entities, bonds, patents, trademarks. Intangible investments include, without limitation, investments in stocks, bonds, notes and other debt obligations.”

COMMERCE TAX NEWS
COMMERCE TAX QUESTIONS AND ANSWERS
Exempt Status Entity Form for Exempt Entities registered with NV Secretary of State

NV does not have an individual income tax regime.

NV does not have an estate or inheritance tax system.

NV is one of the best states for traders.

42. New Hampshire:

NH has an 8.5% Business Profits Tax (BPT) “assessed on income from conducting a business activity within NH. Every business organization, organized for gain or profit carrying on business activity within the state is subject to this tax. However, organizations with $50,000 or less of gross receipts from all their activities are not required to file a return,” per Taxpayer Assistance – Overview of New Hampshire Taxes.

NH includes TTS trading gains in gross receipts for BPT.

NH also has a 0.75% Business Enterprise Tax (BET) assessed on the Enterprise Value Tax Base (EVTB). The base is the “sum of all compensation paid or accrued, interest paid or accrued, and dividends paid by the business enterprise, after special adjustments and apportionment,” per above NH site.

NH has a limited individual income tax regime: A 5% tax on interest and dividend income, and no taxes on wages, capital gains, and other personal income.

NH does not have an estate tax or inheritance tax.

This blog post completes our five-part series “Trader Tax Battle Of The States.”

Attend our Webinar or watch the recording afterward: Trader Tax Battle Of The States.

Traders have unique tax issues on state and local income tax returns for business entities and individuals. Moreover, state and local tax regimes vary significantly. The preferred business entity for a trader is an S-Corp pass-through entity, which is free of entity-level federal taxation. Some states and cities subject S-Corps to taxation. (Read our recent blog post: A Few States Tax S-Corps: Traders Can Reduce It.)

In my five-part series “Trader Tax Battle Of The States,” I focus on state and local tax systems for S-Corps, LLCs, and partnerships. I mention basic information about individual income tax, estate and inheritance tax regimes. The numbers listed below are the states ranking by population.

11. New Jersey:

NJ has an S-Corp Minimum Tax (MT) based on NJ gross receipts (GR), which includes net trading gains. It is $375 for less than $100,000 GR, $562.50 for less than $250,000 GR, $750 for less than $500,000 GR, $1,125 for less than $1M GR, and $1,500 if $1M GR or more. See S Corporation – MINIMUM TAX on Corporation Business Tax Overview.

NJ has a Partnership Filing Fee: “For New Jersey Gross Income Tax purposes, every partnership or limited liability company (LLC) that has income from sources in the State of New Jersey, or has a New Jersey resident partner, must file the New Jersey Partnership return, Form NJ-1065. The $150/partner fee is not to exceed $250,000 for each partnership with more than two partners. Assessed on partnerships with more than two partners AND having income or loss derived from New Jersey sources…,” per Partnership Filing Requirements.

NJ has a progressive individual income tax system, and the top rate is 8.97% on income over $500,000.

NJ individual income tax rates are lower than New York State/City rates, but many traders pay higher taxes in NJ because it does not allow deductions for most losses*. That includes business losses, caused by trading business expenses, net capital losses and net Section 475 ordinary trading losses. NJ only allows certain itemized deductions. NJ’s restrictions on deductions translate to higher effective tax rates. Many traders have net losses in some years, and they do not find tax relief in NJ.

*NJ Notice: “ALTERNATIVE BUSINESS CALCULATION DEDUCTION FOR CERTAIN BUSINESS ENTITIES CONSOLIDATION AND CARRYFORWARD. Effective for tax years beginning on or after January 1, 2012, (NJ) establishes an alternative business calculation deduction under the New Jersey Gross Income Tax Act with the intent of giving income tax relief to taxpayers with business losses. The new legislation provides a deduction which uses a calculation that consolidates business income and/or loss and allows taxpayers to carry forward unutilized losses.” (See examples in the notice.)

NJ has an estate tax rate up to 16% and an exemption of $675,000, which is the lowest exemption in the country.

NJ has an inheritance tax rate up to 16%.

With high individual tax rates, disallowance of most losses*, high minimum tax on S-Corps, and the lowest estate exemption in the country, NJ is one of the worst tax states for traders.

13. Washington:

WA has a Business & Occupation Tax (B&O) assessed on gross receipts from business activities. See Business & Occupation tax. Tax rates vary by classification, with the highest rate 0.15% applying to a service business.

WA exempts a trading company from B&O tax, providing it does not have other types of income like management fees or profit allocation (carried interest) in a hedge fund. (Learn more on the WA site: Income derived from investments.)

WA does not have an individual income tax system.

WA has the highest estate tax rate (20%) in the country, and the estate exemption is 2.054M.

WA is a good tax state for traders to live in, but not a good place to pass away, if you exceed the estate exemption.

14. Massachusetts:

MA subjects S-Corps to a 0.26% Corporate Excise Tax (CET). It’s applied to MA tangible property or taxable net worth (TNW), which includes trading equity capital and undistributed trading income. The minimum CET is $456, which translates to $175,384 TNW. On $500,000 TNW, CET is $1,300. See MA Corporate Excise Tax.

S-Corps with high gross receipts, which includes net trading gains, may also be subject to an income tax measure of CET. “S-Corps with total receipts of $6 million or more are liable for the income measure of the corporate excise at the following rates: 1.83% on net income subject to tax if total receipts are $6 million or more, but less than $9 million; or 2.75% on net income subject to tax if total receipts are $9 million or more,” per MA tax site.

Most trading companies have trading gains under $6M, so they do not owe the income portion of CET. If you expect trading gains significantly over $6M, consider a dual entity structure: A trading general partnership, which is free of all CET, and an S-Corp management company paying the $456 minimum CET.

MA requires an LLC to file an annual report with a $500 fee. MA does not require an annual report from a general partnership.

MA has an individual income tax regime, with two flat tax rates for 2016. Per MA Personal Income Tax:

– 5.1% tax rate on earned income (salaries, wages, tips, commissions) and unearned income (interest, dividends, and certain capital gains);

– 5.1% tax rate on long-term capital gains (except collectibles);

– 12% tax rate on short-term capital gains, and Section 475 MTM ordinary income from trading gains earned by business traders who made a timely Section 475 election.

MA has an estate tax rate up to 16%. MA has an estate exemption of $1M, which is low among the fifteen states that have an estate tax regime.

Most MA residents pay individual income taxes at the 5.1% rate, which is competitive. But, traders owe the higher 12% rate on short-term capital gains and Section 475 ordinary income, which makes MA a bad tax state for traders.

Attend our Webinar or watch the recording afterward: Trader Tax Battle Of The States.

Traders have unique tax issues on state and local income tax returns for business entities and individuals. Moreover, state and local tax regimes vary significantly. The preferred business entity for a trader is an S-Corp pass-through entity, which is free of entity-level federal taxation. Some states and cities subject S-Corps to taxation. (Read our recent blog post: A Few States Tax S-Corps: Traders Can Reduce It.)

In my five-part series “Trader Tax Battle Of The States,” I focus on state and local tax systems for S-Corps, LLCs, and partnerships. I mention basic information about individual income tax, estate and inheritance tax regimes. The numbers listed below are the states ranking by population.

5. Illinois:

IL has a 1.5% Replacement Tax (RT) on partnerships, trusts, and S corps. There is an exemption for an “investment partnership” per Illinois Income Tax Act (IITA) Section 1501(a)(11.5). An LLC filing a partnership return qualifies for this exemption, but an S-Corp does not.

The 1.5% RT rate is meaningful, so it is important for traders to reduce it. There are two ways: Trade a smaller amount of funds in an S-Corp, so you do not owe significant RT.

Alternatively, if you have a larger amount of capital and expect high income, use a dual entity structure: A trading general partnership, which is exempt from RT, and an S-Corp management company, with reduced RT. The partnership pays the S-Corp a monthly administration fee and profit allocation defined in the partnership agreement. The S-Corp lowers it’s net income and RT, by deducting officer compensation and employee benefit plans, including health insurance premiums and retirement plan contributions. Most trading income remains in the general partnership, free of RT.

IL has an individual income tax system with a 3.7% flat rate. (Update July 6, 2017: IL raised the flat rate to 4.95%)

IL has an estate tax rate up to 16% and an exemption of 4M.

IL reminds me of New York City, with lots of traders working for banks and trading firms nearby commodity and futures exchanges. While most people do not think of IL as a low tax state, its 3.7% flat tax rate on individual income is competitive, and traders can reduce RT on S-Corps.

6. Pennsylvania:

The PA legislature repealed the Capital Stock Tax on LLCs and S-Corps and completed the phase-out by December 31, 2015.

PA has an individual income tax system with a 3.07% flat rate.

PA has an inheritance tax rate up to 15%, but no estate tax.

7. Ohio:

OH has a 0.26% Commercial Activity Tax (CAT) based on taxable gross receipts (TGR). TGR do not include interest (other than from installment sales), dividends, and capital gains. See the CAT table at Important Changes to the Commercial Activity Tax in 2014.

A trading company should owe the minimum CAT of $150 since TGR excludes trading gains.

OH has a progressive individual income tax system, and the top rate is 4.997% on income over $208,500.

OH has no estate or inheritance tax.

8. Georgia:

GA has a net worth (NW) tax on S-Corps. The tax table has many brackets, and here are some examples: $100 for NW less than $100,000, $250 for NW less than $500,000, and $500 for NW less than $1M. See Net Worth Tax Table (pages 8-10) in GA’s 2015 S-Corp Income Tax instructions.

NW includes equity and undistributed income, which means it includes trading capital and undistributed trading gains.

S-Corps and partnerships do not pay an income tax, except they must withhold personal income tax on amounts paid to nonresident shareholders and partners.

GA has a progressive individual income tax system, and the top rate is 6% on income over $10,000 (married filing joint).

GA does not have an estate or inheritance tax.

9. Michigan:

MI does not subject S-Corps and partnerships to Corporate Income Tax (CIT) unless it is a financial institution or insurance company.

MI has an individual income tax system with a 4.25% flat rate.

MI does not have an estate or inheritance tax.

10. North Carolina:

NC has a 0.15% Franchise Tax (FT) on S-Corps based on net worth (NW) or appraised value of NC tangible property. The minimum FT is $35. For example, FT is $150 on $100,000 NW. 2015 North Carolina S Corporation Tax Return Instructions on page 3.

Trading equity capital is part of NW, so if you have significant trading capital, consider a dual-entity trading structure: A trading partnership, which is free of FT, and an S-Corp management company with reduced FT, after paying officer compensation and employee benefit plans.

NC has an individual income tax system with a 5.75% flat rate.

NC does not have an estate or inheritance tax.

Attend our Webinar or watch the recording afterward: Trader Tax Battle Of The States.

Traders have unique tax issues on state and local income tax returns for business entities and individuals. Moreover, state and local tax regimes vary significantly. The preferred business entity for a trader is an S-Corp pass-through entity, which is free of entity-level federal taxation. Some states and cities subject S-Corps to taxation. (Read our recent blog post: A Few States Tax S-Corps: Traders Can Reduce It.)

In my five-part series “Trader Tax Battle Of The States,” I focus on state and local tax systems for S-Corps, LLCs, and partnerships. I mention basic information about individual income tax, estate and inheritance tax regimes. The numbers listed below are the states ranking by population.

3. New York State/City:

You can have an S-Corp for federal and New York State tax purposes, but New York City will disregard your S-Corp tax status and treat it as a C-Corp, a regular corporation. That means your S-Corp owes NYC General Corporation Tax (GCT) of 8.85% on net income.

First, reduce net income with deductions for officer compensation and employee benefit plans. If your income is over $200,000, you may trigger “alternative tax,” which requires adding back officer compensation for an alternative GCT calculation. If you trade significant capital with great success, you may need higher officer compensation to get close to breaking even on the NYC corporation tax return. Higher compensation means higher payroll taxes, but it avoids NYC GCT.

– New York State/City Minimum Tax: There is an NYS S-Corp “fixed dollar minimum tax” based on NYS receipts, which includes trading gains. NYS lowered this minimum tax over the past few years. Currently, it is only $25 if receipts are not more than $100,000, $50 if not more than $250,000, $175 if not more than $500,000 and it rises from there. New York City has a similar fixed dollar minimum tax regime.

– New York City: 4% Unincorporated Business Tax (UBT) applies on unincorporated businesses including LLCs filing partnership returns, general partnerships, and sole proprietorships. NYC exempts a trading company from UBT, providing the company does not have any business income like brokerage commissions, or asset management fees. The company must solely derive its revenue from portfolio income, including capital gains.

Many investment managers and private equity managers use two management companies in NYC to reduce UBT. An LLC or S-Corp for receiving management fees, subject to UBT or GCT. And, an LLC filing a partnership return for receiving capital gains and portfolio income from the underlying hedge fund or private equity fund as profit allocation, otherwise referred to as “carried interest.”

On Feb. 4, 2016, NYC submitted a resolution to “eliminate the exemption of private investment fund carried interest from the New York City unincorporated business tax.” Minutes of the Stated Meeting Feb. 24, 2016, state: “Resolved, That the Council of the City of New York, calls upon the President of the United States to close the federal carried interest tax loophole using executive action.” In other words, NYC did not repeal carried interest. NYC proposed similar repeal in 2012 but did not enact repeal at that time, either.

NYS and NYC have progressive individual income tax systems. The top NYS rate is 8.82% on income over $2,125,450. The top NYC resident rate is 3.876% on income over $500,000. An NYC resident has a combined top rate of 12.7%.

NYS has an estate tax rate up to 16% and an exemption of 3.125M, which is below the federal exemption of $5.450M for 2016.

Many traders working for banks and hedge funds work and live in NYS/C, but online traders often move to a tax-free state like Florida to avoid high state/city taxes on S-Corps, individual income, and estates. It is not easy to change your tax residence away from NYS/C. Read my blog post: Bill de Blasio’s tax-the-rich plan.

4. Florida:

Florida does not tax S-Corps, or LLC’s filing as a partnership unless the LLC has a corporate owner. FL does tax corporations, see Florida’s Corporate Income Tax.

FL does not have an individual income tax system.

FL does not have an estate or inheritance tax regime.

With no state tax on S-Corps, individuals or estates, FL is one of the best tax states for online traders.

Learn the rules for establishing residency in Flordia. Read Florida Residency.

Attend our Webinar or watch the recording afterward: Trader Tax Battle Of The States.

Trading is a virtual business: All you need is money, a home office with computers, multiple monitors, high-speed Internet, market information and other trading services. Trading does not require an outside office or customers.

As a trader, you can move to a tax-friendly state. For example, if you retire from a job in high-tax California, New York State/City, Massachusetts, or New Jersey, you can move to tax-friendly Texas, Florida, or Washington.

Seven states do not have individual income tax regimes including Texas, Florida, Washington, Nevada, South Dakota, Alaska, and Wyoming. Tax Foundation publishes a handy state map: State Individual Income Tax Rates and Brackets for 2016.

“Currently, fifteen states and the District of Columbia have an estate tax, and six states have an inheritance tax. Maryland and New Jersey have both,” according to Tax Foundation’s Does Your State Have an Estate or Inheritance Tax? Many of the states with an estate or inheritance tax are in the northern part of the country.

In my five-part blog series “Trader Tax Battle Of The States,” I list states by population size. I cover the top eleven states, plus others, too. Over the past decade, some high-tax states lowered taxes to be more competitive and slow the exodus of residents to tax-free states. A few jurisdictions tax S-Corps, the preferred choice of entity for business traders, and I explain ways to reduce state or city S-Corp taxes.

1. California:

– S-Corps owe Franchise Tax (FT), which is the greater of 1.5% of net income or $800 minimum tax, even in a short year. There are two exceptions to minimum FT: For a first-year S-corp, or an S-Corp formed after Dec. 17, providing it did not conduct business until Jan. 1 of the following year. CA S-Corps.

The 1.5% FT rate is meaningful, so it is important for traders to reduce it. There are two ways: Trade a smaller amount of funds, so you do not owe FT above the $800 minimum. Alternatively, use a dual entity structure: A trading general partnership, which is exempt from FT, and an S-Corp management company for employee benefit plan deductions with lower income, and thereby lower FT.  Most trading income remains in the general partnership, free of FT.

The S-Corp’s income should be under $53,333, so you pay the $800 minimum tax only ($800 divided by 1.5% FT equals $53,333).  Calculate S-Corp net income after deducting officer compensation, health insurance, and retirement plan contributions. The partnership pays the S-Corp a monthly administration fee and profit allocation defined in the partnership agreement. The S-Corp needs this income to pay compensation and the employee benefits. In effect, the dual entity structure carves out net income to limit FT to the minimum, and the remainder of the income is exempt from FT. For a trader with consistent trading income over several hundred thousand, the dual entity structure delivers meaningful tax savings.

There are two routes to S-Corp tax treatment: Form an LLC or Corporation, and elect S-Corp treatment on Form 2553 within 75 days of inception.

– LLC tax: An LLC owes the $800 minimum FT, but not the 1.5% FT rate paid by S-Corps. The minimum FT applies to single-member LLC’s (SMLLC), LLC’s filing a partnership tax return, and limited partnerships (LP’s). General partnerships are exempt from the $800 minimum tax.

– LLC fee: There is a fee based on gross income: $0 if gross income is under $250,000, $900 if under $500,000, $2,500 if under $1M, $6,000 if under $5M, $11,790 if over $5M. Instructions (page 2 LLC Fee). Gross income includes net trading gains.

– If an LLC elects S-Corp tax treatment, California waives the LLC fee. California also waives the $800 minimum tax for first year S-Corps, whether formed as an LLC or corporation.

CA has a progressive individual income tax system, and the top rate is 13.3% on income over $1 million. Tax Table.

CA does not have an estate or inheritance tax.

2. Texas:

– Franchise Tax (FT) on limited liability entities and trusts. The FT rate is 0.75% for most entities times gross margin (defined below). The no tax due threshold is $1.11 million. TX exempts general partnerships from FT, providing they are owned entirely by natural persons.

“Exempt entities: Passive entities including partnerships (general, limited and limited liability) and trusts (other than business trusts) may qualify as a passive entity and not owe any franchise tax for a reporting period if at least 90% of the entity’s federal gross income is from net capital gains from the sale of real property, net gains from the sale of commodities traded on a commodities exchange and net gains from the sale of securities,” per 2016 Texas Franchise Tax Report Information and Instructions.

Unfortunately, an S-Corp does not qualify as an exempt entity.

Gross margin is total revenue times 70%, minus Cost of Goods Sold (COGS), minus allowed compensation, minus the no tax due threshold of $1.11 million. After this calculation, most traders will not have an amount subject to FT, and there is no minimum FT.

If you expect significant trading income, which subjects you to a material amount of FT, consider a dual entity solution: A trading general partnership or LLC, which is exempt as a passive entity, and an S-Corp management company, which won’t exceed the FT threshold.

Few TX traders pay FT.

TX does not have an individual income tax.

TX does not have an estate or inheritance tax.

TX is one of the best tax states for traders.

See the rest of my upcoming five-part blog series: Trader Tax Battle Of The States
New York Vs. Florida;
Midwest Vs. Southeast Top 10 States;
New Jersey, Washington & Massachusetts;
Nevada, New Hampshire & District Of Columbia

Attend our Webinar or watch the recording afterward: Trader Tax Battle Of The States.