Category: Tax Changes & Planning

2025 Year-End Tax Planning for Traders and Investors Under the OBBBA

October 8, 2025 | By: Robert A. Green, CPA | Read it on

Get ready for year-end with proactive tax planning for traders. The One Big Beautiful Bill Act (OBBBA) made many TCJA provisions permanent and extended valuable deductions for traders. Smart timing of income, PTET payments, and S-Corp benefits before December 31 can lower your 2025 tax bill and set you up for success in 2026.

Overview Introductory Note on Financial Product Tax Treatment

Every trader should understand how different financial instruments are taxed. Securities, futures, options, ETFs, ETNs, forex, digital assets, precious metals, and commodities are all subject to different tax treatments. This post includes a complete reference section later in the article detailing those distinctions.

Overview

Year-end is the best time for active traders to take control of their 2025 tax outcome. With significant changes under the One Big Beautiful Bill Act (OBBBA), signed July 4, 2025, traders can capitalize on lower tax rates, wider brackets, and enhanced deductions made permanent from the 2017 Tax Cuts and Jobs Act (TCJA). Whether you’re using Trader Tax Status (TTS), the Section 475 mark-to-market (MTM) election, or traditional capital-gain treatment, proactive steps before December 31 can save thousands in taxes.

1. OBBBA Made TCJA Benefits Permanent

Note: 2025 thresholds verified under OBBBA; cross‑checked with multiple trusted tax publishers to ensure accuracy, as IRS pages may remain outdated.

  • Lower tax brackets preserved: The top individual rate remains 37%, avoiding the scheduled rise to 39.6%. Marriage penalty relief is available across most brackets.

  • Higher standard deduction: $15,750 single / MFS, $31,500 MFJ, and $23,625 HOH for 2025 (filed in 2026).

  • Qualified Business Income (QBI) deduction retained: Section 199A continues for traders with TTS and Section 475 income, subject to thresholds.

  • $40,000 SALT deduction cap: Extended for 2025 (with 1% annual indexing through 2029).

  • 100% bonus depreciation: Permanently reinstated for qualifying assets placed in service after January 19, 2025.

  • Section 174A – Internal-Use Software Expensing: Domestic R&E expenses, including internal-use software, are fully deductible in the year incurred.

These provisions give traders and their pass-through entities a stable planning framework for years ahead.

2. The SALT Cap and PTET Strategy Still Matter

The $40,000 SALT cap doesn’t eliminate the advantage of Pass-Through Entity Tax (PTET) elections. PTET allows partnerships and S-corps to pay state tax at the entity level, making it fully deductible against business income for federal purposes—bypassing the SALT cap.

Action items:

  • Confirm or elect PTET before your state’s deadline.

  • Pay 2025 PTET installments by year-end to secure the deduction.

  • Coordinate your PTET with your QBI deduction and NIIT exposure to maximize overall benefit.

3. Capital Gains and Loss Harvesting Still Work

“Selling losers to offset winners” remains a core year-end move.

For active traders without Sections 475 or 1256 (futures):

  • Harvest losses to offset realized capital gains.

  • Use up to $3,000 of net capital loss to offset ordinary income.

  • Match long-term losses against short-term gains—taxed up to 37% plus 3.8% NIIT.

For Section 475 securities traders, wash-sale and capital-loss limitations are eliminated; ordinary losses can now offset all sources of income.

Investors must still comply with wash-sale rules under Section 1091, which disallow losses when substantially identical securities are repurchased within 30 days before or after the sale.

4. Avoid the Wash-Sale Trap

Under Section 1091, no loss is recognized if you reacquire substantially identical stock or securities within 30 days before or after the date of sale. This can occur across multiple brokerages or even IRAs. (IRA accounts on their own do not have wash sales.)

Warning: It’s a problem when you repurchase a losing trade from a taxable account in an IRA. That causes a permanent loss of the wash sale, whereas in taxable accounts, wash sales are merely deferred. 

The IRS wash sale rules for brokerage firms are narrower and differ from the IRS rules for taxpayers, which are broader. Brokers report wash sales for each account based on identical securities. Conversely, taxpayers should report wash sales on all accounts on a combined basis, as well as on substantially identical securities. For year-end planning, consider using TradeLog to comply with the IRS wash sale rules for taxpayers. 

Trader tips:

  • Close losing positions by mid-December to ensure 2025 loss recognition, and wait for the rest of the 30 days in January 2026 before repurchasing a substantially identical security. (“Break the chain” strategy.)

  • Turn off DRIPs before year-end.

  • Replace exposure with similar but not identical ETFs (e.g., sell SPY, buy SPLG). Each ETF has S&P 500 exposure, but they are not substantially identical. 

  • Section 475 traders are exempt from wash sales.

5. Timing Income and Deductions Under OBBBA

  • Defer income to 2026 if possible—through timing of C-corp dividends, bonuses, or realized gains. (Partnership and S-corp distributions are generally non-taxable and don’t defer income.)

  • Accelerate losses and deductions into 2025 if you expect income to drop in 2026, capturing current-year savings while rates remain constant.

  • Bunch charitable or state-tax payments to exceed the higher standard deduction in alternating years, and itemize deductions. (The new above-the-line charitable deduction doesn’t apply until the 2026 tax returns.)

6. Section 475 and Trader Tax Status: Positioning for 2025 and Beyond

Although the Section 475(f) election for 2026 is filed with your 2025 return or extension (April 15, 2026, for individuals, March 15, 2026, for partnerships/S-corps), Q4 2025 is the time to evaluate your Trader Tax Status (TTS) and decide how Section 475 fits into your broader plan.

Consider using Green’s Trader Tax Status Qualification App

Why This Matters at Year-End

  • Under 475, all trading gains and losses become ordinary, eliminating the $3,000 capital-loss limit and wash-sale deferrals.

  • Staying under capital-gain treatment allows for loss harvesting and preferential long-term rates.

  • Once elected, 475 applies only while TTS is active; if TTS lapses, the mark-to-market method is suspended for the non-TTS period.

Assessing TTS Eligibility Before Year-End

TTS qualification determines whether you can deduct trading business expenses and apply Section 475 for 2025 (if you previously elected Section 475 on time).
If you cease active trading before year-end—for example, TTS stops after Q3—then Section 475 is suspended for Q4 2025, and trading after that point reverts to capital-gain treatment.

Maintain a consistent trading cadence through Q4 to preserve TTS for the entire year and keep Section 475 in effect without interruption.

If a trader wants to form a new entity for TTS and tax benefits, they should have created it before the start of Q4. Establishing an entity for only one quarter of the year is generally not enough time to safely demonstrate TTS eligibility or fully utilize related deductions and benefits.

Segregating Investments From Trading

Traders eligible for TTS and using Section 475 can also maintain separate investment positions, subject to capital gains taxation. To preserve this distinction and comply with IRS rules:

  • Use separate brokerage accounts for 475(f) trading vs. investments.

  • Avoid holding the same or substantially identical securities in both accounts.

  • If investments are held inside a 475 account, you must contemporaneously record each investment in your records on the day of purchase (e.g., in a trade log or journal). Without this same-day identification, the IRS may treat the position as a 475 trading position or bar a loss from using the 475 method.

  • Do not reclassify losing investments as trading positions later—a TTS trader cannot convert a losing investment position into a trading position to turn an unrealized capital loss into an ordinary loss. Such retroactive relabeling violates Section 475 and can trigger IRS adjustments and penalties.

  • Maintain documentation that demonstrates investment intent, more extended holding periods, and a reduced frequency of trading.

  • Report trading under Form 4797 and investments on Form 8949 / Schedule D.

This segregation ensures you retain the benefits of both worlds—ordinary-loss treatment for trading (and QBI deduction on Section 475 income), and preferential capital-gains rates for long-term investments.

Accelerating Expenses Under OBBBA

If TTS is strong in 2025 but uncertain for 2026, consider accelerating business expenses into 2025 to secure full deductions while TTS clearly applies. The One Big Beautiful Bill Act (OBBBA) strengthened TCJA’s bonus depreciation rules, allowing 100% expensing for most business equipment, computers, furniture, and software placed in service by December 31, 2025.

Other acceleration opportunities:

  • Prepay subscriptions, education, and trading-related services within the 12-month rule.

  • Upgrade trading workstations and technology before year-end to qualify for full expensing.

  • Pay professional and advisory fees (such as tax consultations or accounting software) by December 31 for the 2025 deduction.

7. The QBI Deduction: Preserve It With an S-Corp

The Section 199A Qualified Business Income (QBI) deduction continues after OBBBA and remains a valuable planning opportunity for traders with TTS who use the Section 475(f) method. The deduction equals up to 20% of qualified ordinary trading income, minus TTS expenses, and can lower the effective top rate from 37% to about 29.6% when applicable.

Phaseout thresholds (2025): The OBBBA made the Section 199A QBI deduction permanent but left 2025 thresholds unchanged. For tax year 2025, the existing SSTB limits remain in effect: $197,300 (single and other) and $394,600 (MFJ), with phaseouts ending at $247,300 and $494,600, respectively. Beginning in 2026, the OBBBA significantly expands these ranges, increasing the phaseout window from $50,000 to $75,000 for single filers and from $100,000 to $150,000 for joint filers. The income thresholds themselves will adjust for inflation in 2026. The law also introduces a new minimum QBI deduction of $400 for taxpayers with at least $1,000 of QBI from an active business, indexed for inflation starting in 2027.

Understanding QBI Mechanics for Traders

  • Within the phaseout range, an SSTB like a TTS trading business may qualify for a partial deduction based on the lesser of:

    • 20% of qualified business income (QBI), or

    • The greater of 50% of W-2 wages, or 25% of W-2 wages plus 2.5% of the unadjusted basis (UBIA) of qualified property.

  • Traders generally have little or no qualified property, so the 50% of W-2 wages test typically applies.

  • A TTS S-Corp can pay the owner W-2 wages, unlocking health insurance and retirement plan deductions, as well as potentially supporting a limited QBI deduction within the phaseout range.

  • Partnerships and sole proprietorships cannot pay the owner W-2 wages; however, they can include non-owner employee wages to satisfy the wage limitation test.

Planning Notes

Because trading is an SSTB, the QBI deduction phases out entirely once taxable income exceeds the upper threshold. For traders with taxable income inside the phaseout range, S-Corp wages can help optimize QBI benefits while preserving access to health insurance and retirement deductions.

8. Retirement and S-Corp-Level Planning

TTS S-Corp entities offer valuable benefits, including Solo 401(k) and SEP IRA contributions, as well as health insurance deductions. Make elective deferrals by December 31 and employer contributions by the filing deadline. Ensure S-corp payroll meets the wage base for both retirement limits and QBI optimization.

2025 Retirement Contribution Limits 

  • Solo 401(k) elective deferral: $23,500 (employee contribution limit)

  • Catch-up contribution (age 50+): $7,500

  • SECURE 2.0 catch-up (ages 60–63): $11,250 (if plan allows)

  • Employer profit-sharing contribution: Up to 25% of W-2 wages, capped at $46,500.

  • Total contribution limit: $70,000 ($77,500 including catch-up)

S-Corp Advantage for Traders

  • Earned income: S-Corp officer compensation qualifies as earned income, allowing for deductions for health insurance and retirement plans.

  • Solo 401(k) deadlines: The plan must be established by December 31, 2025, with elective deferrals made by the end of the year. Employer contributions (profit sharing) are deductible through the S-Corp return due date, including extensions (generally September 15, 2026).

  • SEP IRA option: Simplified alternative; 25% of compensation up to the same annual limits. No elective deferrals or catch-ups. The Solo 401(k) requires less salary, resulting in savings on payroll taxes. 

  • No “reasonable compensation” rule: A TTS S-Corp determines wages based on desired health insurance and retirement benefits, as well as QBI deductions in the phaseout range, rather than on general industry standards or the 25% to 50% of net income norm.

For more details, see GreenTraderTax Retirement Solutions.

9. New OBBBA Temporary Provisions Affecting Individuals

Temporary for tax years 2025 through 2028. For non-itemizers and itemizers.

  • Senior Deduction $6,000/year single, $12,000 MFJ. Age 65 or older. Phases out (MAGI) over $75,000 single or $150,000 MFJ.
  • Overtime Deduction capped at $12,500/ year single, $25,000 MFJ. Phases out (MAGI) over $150,000 single, or $300,000 MFJ.
  • Car-Loan Interest Deduction up to $10,000. Phases out (MAGI) over $100,000 single, or $200,000 MFJ.

Other OBBBA provisions are permanent.

  • Permanent 60% AGI limit for cash charitable gifts.

  • Estate & Gift exemption rises to $15 million in 2026—update estate plans.

  • Pease Limitation repealed—itemized deductions less restricted for high earners.

10. Year-End Example: Active Trader Couple

Scenario: Married TTS traders using an S-Corp, filing jointly

  • $550K Section 475 income (ordinary)

  • $50K long-term capital gains

  • $20K unrealized losses

Moves before December 31:

  1. Elect PTET for S-Corp → $35K state tax deduction from gross income, unlocking full standard deduction on individual tax return.

  2. Harvest (sell) $20K capital losses → offset against capital gains.

  3. Contribute the maximum allowed $70K Solo 401(k) through S-Corp.

  4. Health insurance deduction $25k through S-Corp.

  5. Pay $186K W-2 salary → to maximize Solo 401(k) and also qualify for partial QBI deduction within the phaseout range.

  6. Donate $10K cash → within 60% AGI limit. (Use standard deduction, which is higher)

Calculations:

  • Gross income = $580K (550k trading + 30k LTCG).

  • Deduct 130k = PTET ($35K) from gross income, Solo 401(k) ($70K) AGI deduction, ($25k) health insurance AGI deduction, Adjusted gross income = $450K.

  • Standard deduction ($31.5K) → taxable income ≈ $418.5K.

  • This keeps taxable income within the QBI phaseout range (starts $394.6K, ends $494.6K MFJ for 2025), allowing a partial QBI deduction.

Result: Taxable income reduced by ~$130K, enabling a limited QBI deduction, NIIT savings, and lower effective tax rate — demonstrating coordination of PTET, retirement, health, and capital loss harvesting. Payroll is the lever that counts, so find your sweet spot to unlock the most tax savings.  

11. Final Checklist for December 31

  • Review YTD trading and investment gains/losses

  • Harvest capital losses and avoid wash-sales

  • Maximize state PTET through S-Corps and LLC/partnerships

  • Maximize health insurance and retirement contributions through an S-Corp

  • Execute S-corp payroll before the year-end

  • Confirm TTS status through year-end

  • Accelerate TTS expenses (100% expensing)

  • Schedule 2025 tax consultation

12. Tax Treatment of Financial Products: Detailed Reference

Every trader should understand how different financial instruments are taxed. Below is an expanded summary organized by the categories in the GreenTraderTax Tax Treatment Center and the “Explore Tax Treatment on Financial Products” section:

Capital Loss Carryovers: Capital losses offset capital gains and up to $3,000 of ordinary income ($1,500 if married filing separately). Unused losses carry forward indefinitely. Section 475(f) traders report ordinary losses that do not absorb capital-loss carryovers.

Securities: Stocks and narrow-based ETFs are subject to realization accounting, capital gains treatment, and wash-sale loss deferrals under Section 1091. Traders qualifying for TTS can elect Section 475(f) treatment for ordinary gain or loss, thereby avoiding wash sales and the $3,000 limitation. Report on Form 8949/Schedule D or Form 4797 if using Section 475.

Section 1256 Contracts (Futures, Broad-Based Index Options): Receive 60% long-term and 40% short-term capital gains treatment, regardless of holding period. Section 1256 contracts are marked-to-market at year-end, and losses may be carried back three years against prior Section 1256 gains (as reported on Form 6781). Traders can also opt for a mixed straddle treatment.

Options: Equity options are taxed as securities. Gains or losses are capital and depend on the holding period. Wash-sale rules apply to substantially identical options. Complex rules for straddles, constructive sales, and Section 1258 conversion transactions can defer losses or recharacterize gains. Options on futures are taxed the same as futures, which are Section 1256 contracts.

Exchange-Traded Funds (ETFs): Most ETFs are registered investment companies (RICs) taxed as securities. Commodity or futures-based ETFs may issue K-1s with Section 1256 gains, but for sales, they are treated like securities. Grantor-trust metals ETFs (e.g., GLD, SLV) are taxed as collectibles (28% maximum rate).

Forex: Spot and forward contracts default to Section 988 ordinary gain or loss treatment. Traders can elect out of Section 988 for specific contracts and into Section 1256(g) for capital-gains treatment, but elections must be made prospectively.

Cryptocurrencies and Digital Assets: See Digital Asset Trading Explained: Tax Rules for Crypto ETFs, Futures, Options, and Tokens. Digital assets are treated as property for federal tax purposes, rather than as currency. Traders must report sales and exchanges as capital transactions. Short-term and long-term capital gains apply based on the holding period. Mining, staking, and airdrops generate ordinary income at the time of receipt. Crypto futures on regulated U.S. exchanges qualify as Section 1256 contracts (60% long-term / 40% short-term). Wash-sale rules currently do not apply to crypto but may under future legislation. ETFs and ETNs holding digital assets follow their fund structure—RIC, grantor trust, or partnership. Proper recordkeeping is essential: use software or blockchain explorers to track cost basis, proceeds, and holding periods accurately.

Other Financial Products: This includes swaps, structured notes, CFDs, and foreign exchange derivatives. Most are subject to ordinary income treatment unless they qualify for capital gains under specific elections. See Other Instruments for detailed character and timing rules.

Volatility exchange-traded notes (ETN) are structured as “prepaid forward contracts” or “debt instruments.” The IRS does not consider an ETN prepaid forward contract a security, whereas ETN debt instruments are. Sales of ETN prepaid forward contracts use the capital gains realization method on sales. Because it’s not a security, ETN prepaid forward contracts (i.e., VXX) are not subject to wash-sale loss adjustments or Section 475 (if elected).

Short Selling: Short sales are not recognized until the position is closed. Gains are always short-term. Losses are also short-term, except in rare cases involving hedging or straddling. Shorting substantially identical securities may create constructive sales or defer losses.

13–26. Expanded Planning Topics

13. Excess Business Loss & NOL: $313k single / $626k MFJ 2025 thresholds; excess business losses (EBL) become NOL carryforwards with an 80% income offset limit in the subsequent years. (The 2026 amount is $256k single / $512k MFJ after changes from OBBBA. The 2026 limits are lower than for the 2025 tax year. That gap reflects a smaller COLA/inflation adjustment in 2026 than in 2025. OBBBA reset the baseline for EBL inflation indexing to the pre‑2017 period.)

14. Defer vs. Accelerate: Match timing to expected 2026 income shifts.

15. Roth IRA conversions: Pair with Section 475 losses to use brackets efficiently.

16. 0% LTCG: 2025 thresholds $48,350 single / $96,700 MFJ / $64,750 HOH.

17. NIIT: 3.8% surtax above $200k single / $250k MFJ / $125k MFS.

18. Business expenses: 100% expensing; $2,500 de minimis; investment expense suspension continues.

19. Estimated taxes: Pay Q4 by January 15, 2026; consider adding to withholding at year-end to avoid underestimated tax penalties. Consider paying state estimated taxes before December 31, 2025, to take advantage of the new $40k SALT cap. However, keep an eye on AMT for which SALT is not deductible.

20. Wash-sale tactics: Use a new 2026 entity to reset positions, which breaks the chain on 2025 wash-sale losses.

21. TTS & Section 475 ops: Timely elections; mid-year suspension planning. If you have a significant capital loss carryover going into 2026, consider the pros and cons of making a 475 election. See chapter 2 of Green’s 2025 (or 2026) Trader Tax Guide for decision-making rationale.

22. S-Corp benefits: W-2 pay, accountable plans, health & Solo 401(k) integration, PTET SALT cap workaround, and QBI phaseout ranges.

23. New entity setup for 2026: Form single-member LLC in Dec 2025. On January 1, 2026, add your spouse as a partner in a partnership or elect S-Corp treatment for 2026. Elect Section 475 within 75 days of inception (January 1, 2026) by internal resolution for the LLC/partnership or S-Corp. “new taxpayer” exception.

24. Straddles: Avoid constructive sale/receipt traps.

25. Charitable: Donate appreciated stock; 60% AGI limit.

26. Disaster relief: Monitor IRS/state relief, including extended payments and tax returns, plus tax loss benefits. 

Conclusion

OBBBA locks in a favorable tax environment for traders—but timing, TTS qualification, entity strategy, and QBI management still separate the merely compliant from the truly optimized. Before December 31, review your positions, confirm elections, and fine-tune income levels to maximize deductions and minimize your tax liability.

Schedule Your 2025 Trader Tax Planning Consultation
The GreenTraderTax team at Green, Neuschwander & Manning, LLC, can help you navigate these changes and tailor a strategy for your trading business.
Book Now → greentradertax.com/services/consultations

Can a Trader Benefit from Qualified Small Business Stock (QSBS) Under Section 1202?

September 10, 2025 | By: Robert A. Green, CPA | Read it on

Executive Summary

Section 1202 of the Internal Revenue Code offers one of the most valuable tax breaks for investors: the ability to exclude up to 100% of capital gains on qualified small business stock (QSBS). The 2025 One Big Beautiful Bill Act (OBBBA) expanded these benefits by introducing tiered holding periods, raising per-issuer caps, and indexing limits for inflation. However, trading businesses — whether in securities, futures, options, or digital assets — are explicitly excluded from eligibility. Traders cannot benefit through their own C corporation. However, traders may still access QSBS benefits by investing in a qualified trade or business (QTB) startup personally, using gifting and estate planning strategies (which can multiply the per-taxpayer exclusion if done correctly), or rollovers under Section 1045 (where the original QSBS holding period “tacks on” to the replacement QSBS).

What is QSBS?

Section 1202 allows non-corporate taxpayers to exclude from federal tax up to 100% of the capital gain from selling QSBS if:

  • The stock was issued by a C corporation that is a Qualified Small Business (QSB).

  • The stock was acquired initially at issuance for cash, property, or services. Stock acquired from resale doesn’t count. 

  • The taxpayer satisfies the required holding period.

Key 2025 updates and the “applicable date.”

  • Applicable date: On or after July 4, 2025 (the OBBBA enactment date). New rules apply to QSBS acquired on or after this date.

  • Post-7/4/2025 stock: 50% exclusion after 3 years, 75% after 4 years, 100% after 5 years.

  • Pre-7/4/2025 stock: Keeps the legacy 5-year rule (100% exclusion for post-9/27/2010 issuances).

  • Per-issuer cap: The greater of $15M (indexed after 2026) or a 10× basis (legacy $10M applies for earlier stock pre-7/4/2025).

  • Gross-asset limit: $75M for stock issued after July 4, 2025 ($50M for earlier issuances pre-7/4/2025).

Gross-asset test nuance: The aggregate gross-assets test is measured at the corporate level using tax basis: aggregate gross assets = cash plus the adjusted basis of other property. Section 1202(d)(2)(B) treats contributed property as having a basis equal to its fair market value at the time of contribution, and the test must be satisfied both immediately before and immediately after each stock issuance. Example: If a startup receives $30M cash and $19M FMV property, aggregate gross assets = $49M, qualifying under the pre-7/4/2025 legacy threshold of $50M. Once assets exceed the $50M or $75M threshold (depending on acquisition date), new stock issued after crossing that threshold will not qualify as QSBS.

Tax coordination notes: Excluded Section 1202 gains are not included in net investment income (Net Investment Income Tax – NIIT) and are not AMT preference items under current law. For partial exclusions, the excluded portion is still outside NIIT, and no AMT add‑back applies. The taxable (non‑excluded) portion of gain is subject to capital gains rates, generally 28% for Section 1202.

QSBS Key Limits Overview

Example: An investor purchases QSBS with a $2M basis. Ten years later, the shares are sold for $25M, producing a $23M gain. Because the 10× basis amount is $20M (10 × $2M), the investor can exclude $20M of gain — even though the $15M per‑issuer cap would otherwise apply — leaving $3M taxable.

Rule Pre-7/4/2025 Stock Post-7/4/2025 Stock (OBBBA)
Holding period 5+ years for exclusion 3 yrs = 50%, 4 yrs = 75%, 5+ yrs = 100%
Per-issuer cap $10M (not indexed) $15M (indexed after 2026)
10× basis cap Available Available
Gross-asset limit $50M (at issuance) $75M (at issuance, indexed after 2026)

Traders and the “Excluded Businesses” Rule

Section 1202 excludes certain types of businesses from QSBS eligibility, including investing, trading, financial services, banking, insurance, leasing, and similar activities. This means:

  • A proprietary trading business or hedge fund does not qualify as a QSB.

  • A trading partnership or fund, with or without trader tax status, cannot restructure into a C corporation and expect its shares to be QSBS.

  • Even algorithmic or high-frequency trading firms are excluded, because their principal asset is investment and or trading activity.

This exclusion applies regardless of corporate structure or tax reorganization.

Traders eligible for trader tax status (TTS) prefer spousal LLC/partnerships for a SALT cap workaround strategy, or an S corporation for deducting health insurance premiums and retirement plan contributions, and a SALT cap workaround. C corporations are unsuitable for traders eligible for TTS. (See my related blog post.)

Qualified Trade or Business (QTB) Overview

To qualify, a corporation must conduct an active qualified trade or business (QTB). Section 1202(e)(3) excludes:

  • Specified services: health, law, engineering, architecture, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services.

  • Reputation/skill test: Businesses where the principal asset is the reputation or skill of one or more employees.

  • Financial/asset-based: banking, insurance, financing, leasing, investing, or similar businesses.

  • Other exclusions: farming, natural resource extraction, and hotels, motels, and restaurants.

Practice note: QTB exclusions overlap with Section 199A’s SSTB rules, and trading is also treated as an SSTB for Section 199A QBI purposes. 

Where Traders Might Benefit

  1. Personal Investments: Traders can acquire QSBS by investing in a QTB startup as an individual and holding shares for the required period.

  2. Gifting & Trusts: The per-taxpayer, per-issuer exclusion can be multiplied by distributing QSBS to family members or irrevocable trusts, provided they each hold the stock directly and meet all technical requirements. Example: A founder with $15M of QSBS gain gifts shares to two adult children and an irrevocable trust. Each donee may claim up to $15M (or 10× basis) of exclusion on their pro-rata gains, effectively multiplying the family’s total federal exclusion well beyond $15M. Gift tax and valuation planning should be considered before making transfers.

  3. Section 1045 Rollover: Rollover gains into new QSBS within 60 days; the original holding period “tacks on” to the replacement QSBS, allowing for eventual 100% exclusion once the combined period meets the requirement.

Handling Upfront Startup Losses

Begin by utilizing a pass-through entity (LLC/partnership, or S corporation) to leverage early losses, and then transition to a C corporation that issues QSBS before reaching the $75M limit.

State Tax Implications

Category States Notes
Full Conformity NY, CT, DE, OH, VA, and many others No state tax on excluded gains.
Non-Conforming CA, PA, MS, AL Must add back exclusion and pay full state tax.
Partial HI, MA HI allows 50% exclusion; MA taxes short-term QSBS gains at regular rates and offers reduced rates for long-term QSBS.
Recent Change NJ (2026+) Begins conforming in 2026.

Advisor Tip: Partial conformity states may impose restrictions or higher rates — check with a state tax advisor.

Final Takeaway for Traders

Trading businesses cannot benefit from QSBS. But traders can still capture Section 1202’s powerful tax savings through personal investments, gifting, and rollovers.

California Sidebar: California does not conform to Section 1202. Even fully excluded federal QSBS gains are taxed by California.

Disclaimer

Section 1202 QSBS strategies can offer extraordinary tax savings, but they are complex and closely scrutinized by the IRS. Consider consulting a tax attorney or CPA with deep experience in structuring and deploying Section 1202 strategies before acting.

Sources

  • Thomson Reuters Checkpoint §1202 (exclusions include investing, trading, financial services, asset management).

  • Frost Brown Todd LLP: Analysis of Section 1202 business exclusions and California nonconformity.

  • NSKT Global, KB Financial Advisors, Robert Hall & Associates: State conformity guidance.

  • IRC §1202, OBBBA (P.L. 119-21).

SALT Cap Workaround Update: Why PTET Elections Still Matter After OBBBA

August 29, 2025 | By: Robert A. Green, CPA | Read it on

The $40,000 SALT cap phases out for high earners. Learn why PTET elections remain vital—preserving deductions, lowering AGI, and reducing AMT income.

In my earlier blog posts — Senate Tax Bill Preserves SALT Workaround for Traders and SSTBs and OBBBA Trader Tax Update: 2025 Law Secures Key Provisions for Traders — I explained how Congress ultimately preserved the pass-through entity tax (PTET) SALT cap workaround and temporarily raised the SALT cap from $10,000 to $40,000 for 2025, with indexing through 2029. That legislative victory answered months of uncertainty: the SALT cap increase and PTET deductibility passed both chambers intact, and President Trump signed the bill before the July 4 recess. 

How the SALT Cap Workaround Works

The SALT cap limits itemized deductions for state and local taxes on individual returns. It includes state and local property taxes, as well as either state and local income taxes or state and local sales taxes (but not both in the same year).To bypass this, many states created pass-through entity tax (PTET) elections. With PTET, state income taxes are paid at the entity level. PTET entities include general and limited partnerships, multi-member LLCs filing as partnerships, single-member LLCs electing S-Corp status, and S-Corps. Sole proprietors filing a Schedule C and single-member LLCs taxed as disregarded entities are not eligible for the PTET workaround.

PTET payments are treated as a business expense, fully deductible on the federal return, and then credited to the owner’s state tax return. This shifts the deduction from the limited individual level to the unlimited business level, preserving a tax benefit that might otherwise be lost. The pass-through entity must operate a business, which includes traders eligible for Trader Tax Status (TTS). Most taxpayers also have other types of income, including wages, fees, and portfolio income. State taxes paid on that non-business income must remain on the individual tax return and are applied towards the SALT cap. 

Each state’s PTET regime may still have quirks or limitations—so entity owners should review both state and federal impacts. For example, some states disallow PTET for certain types of business entities (e.g., passive investment partnerships). Be aware of the mechanics and timing of PTET elections (e.g., the fact that some states require annual or even quarterly elections, with specific deadlines).

Phaseout of the Higher SALT Cap

OBBBA’s $40,000 SALT cap is not equally available to all taxpayers. For married filing jointly and single taxpayers with modified adjusted gross income (MAGI) over $500,000 (or $250,000 for married filing separately), the benefit begins to phase out:

  • Formula: Phaseout = 30% × (MAGI – $500,000)

  • Example: A couple filing jointly with $600,000 of MAGI would see a reduction of 30% × $100,000 = $30,000. Their SALT deduction falls from $40,000 to the minimum $10,000. Both the cap and the MAGI threshold are indexed by 1% annually (so for 2026, the threshold is $505,000, and so on).

That means high-income taxpayers — especially those above $600,000 MAGI — effectively revert to the old $10,000 cap. For them, the PTET election is often the only way to preserve a substantial SALT deduction at the federal level.

PTET Benefits Beyond the SALT Cap

Impact on Self-Employment Tax (Partnerships)
For operating partnerships engaged in an active trade or business (e.g., law firms, professional practices, and consulting firms), PTET deductions reduce the net income before it is passed through to the partners. This lowers self-employment (SE) income and reduces SE tax liability — a benefit the individual SALT cap doesn’t provide.

  • Partnerships eligible for Trader Tax Status (TTS) are different. Trading gains are considered unearned income; therefore, TTS partnerships do not generate SE income from trading profits and don’t pay SE tax.

In addition to PTET business deductions, which lead to lower federal income taxes on the individual return, PTET has other benefits tied to lower:

  • Adjusted gross income (AGI) and modified AGI (MAGI)

  • Taxable income.

Lower AGI, or MAGI, can unlock or expand deductions and credits that phase out at higher income levels — for example:

  • Passive loss allowance.

  • IRA/Roth IRA contribution eligibility.

  • Child tax credits.

  • Medical expense deduction (7.5% AGI floor).

  • Charitable contribution percentage limitations.

  • Qualified Business Income (QBI) deduction limitations for both SSTBs and non-SSTBs. The 20% QBI deduction is now permanent under OBBBA, with revised phaseout ranges. For 2025, income thresholds are $394,600 (married filing jointly) and $197,300 (single), indexed for inflation. There is also a non-indexed phasein/phaseout range of $100,000 (married) and $50,000 (single), subject to wages and property limitations. Beginning in 2026 under OBBBA, the income threshold will continue to be indexed for inflation. Additionally, OBBBA increases the 2026 phasein/phaseout range to $150,000 (married) and $75,000 (single), which will be indexed for inflation. 

In short:

  • Partnerships with Trader Tax Status (TTS) → PTET lowers AGI and taxable income, improving eligibility for deductions, credits, and QBI. A TTS LLC taxed as a partnership can deliver PTET benefits based on a higher income unencumbered by health insurance and retirement plan deductions. (TTS partnerships cannot pay guaranteed payments to owners, which would be SE income or earned income, and TTS sole proprietors cannot pay wages to the owners; for those, employee benefits are required through an S-Corp.)

In California, LLCs/partnerships owe an annual minimum tax of $800 (plus a gross receipts fee at higher levels), which is still lower than the 1.5% S-Corp franchise tax rate. A few other states may have entity/franchise tax structures that affect PTET planning, but these are generally less costly than those in California. Most states have nominal entity-related taxes. 

  • S-Corps with TTS → PTET integrates with officer compensation, retirement planning, health insurance deductions, and QBI strategies. Health insurance premiums and retirement plan deductions require earned income, which is officer wages for an S-Corp. The S-Corp underlying income is unearned, so a TTS S-Corp does not need to pay the owner “reasonable compensation.” Instead, they can choose the salary amount based on their target deductions for health insurance premiums and retirement plan contributions.

    S-Corps face higher franchise taxes in California (1.5% of net income) compared to LLCs/partnerships. Still, those higher costs can often be offset by the added ability to deduct health insurance and maximize retirement plan contributions.

PTET and the Standard Deduction

Even when taxpayers can deduct all of their state and local taxes due to the increased $40,000 SALT cap for 2025, there are still reasons to consider making the PTET election. If deducting those taxes at the partnership or S-Corp level causes the individual’s remaining itemized deductions to fall below the standard deduction, PTET can increase the taxpayer’s total deductions by allowing the use of the full standard deduction ($31,500 for married filing jointly, $15,750 for single and MFS in 2025). Beginning in 2026, individuals who do not itemize will also be allowed a $1,000 ($2,000 if MFJ) above-the-line deduction for most charitable contributions in cash. PTET can help taxpayers take advantage of both the standard deduction and this above-the-line charitable deduction. Another key point: SALT itemized deductions are not deductible for alternative minimum tax (AMT) purposes, whereas PTET deductions reduce AMT income as well.

PTET Advantages at a Glance

  • Fully deductible at the pass-through entity level for federal purposes, even when the SALT cap limits individual deductions.

  • Preserves state tax deductibility for high-income taxpayers, phased out of the $40,000 SALT cap.

  • Reduces SE tax for operating partnerships.

  • Lowers AGI, MAGI, and taxable income, improving eligibility for credits and deductions, including QBI.

  • Helps taxpayers qualify for the standard deduction and, beginning in 2026, the new above-the-line charitable deduction.

  • Deductible for AMT purposes, unlike SALT itemized deductions.

  • Offers planning flexibility for S-Corps to integrate officer compensation, retirement, and health insurance strategies.

For guidance on whether PTET elections are suitable in your situation, consult your tax advisor. Contact us at GreenTraderTax for professional assistance from Green, Neuschwander & Manning, LLC.

Executive Summary

Congress raised the SALT cap to $40,000 for 2025, but high earners will see it phased out to $10,000. PTET remains essential because it moves state taxes to the pass-through entity level, where they are fully deductible for federal purposes and also reduce AMT income. In effect, PTET shifts the deduction from the limited individual level to the unlimited business level. With OBBBA making the SALT cap workaround permanent, taxpayers have renewed reason to consider entity formation. PTET can also help unlock the standard deduction and, beginning in 2026, the new above-the-line charitable deduction. For guidance, consult your tax advisor or contact us at GreenTraderTax for professional assistance.

Star Johnson, CPA, contributed to this blog post.

OBBBA Trader Tax Update: 2025 Law Secures Key Provisions for Traders

July 9, 2025 | By: Robert A. Green, CPA | Read it on

The One Big Beautiful Bill Act (OBBBA), passed in July 2025, delivers lasting clarity for traders and small business owners by locking in and expanding many tax reforms from the 2017 Tax Cuts and Jobs Act (TCJA). OBBBA makes permanent or extends favorable provisions that benefit traders eligible for trader tax status (TTS) and Section 475 mark-to-market (MTM) accounting.

Unless otherwise noted, all tax law changes and provisions discussed below are effective beginning in 2025.

TTS Rules and Section 475 MTM Unchanged

TTS qualifications and Section 475(f) election rules remain intact. The final OBBBA does not reference or alter Section 475(f), meaning the existing Section 475 mark‑to‑market election for traders remains unchanged under current law. In legislative drafting, if no changes are enacted, existing provisions continue to apply.

TTS traders benefit from the tax treatment of business expenses. (See Trader Tax Status: How To Qualify.) With a timely filed Section 475 election, TTS traders receive ordinary loss treatment, which avoids the $3,000 capital loss limitation and exempts them from wash sale loss adjustments on securities. Profitable TTS traders can treat Section 475 ordinary income as qualified business income (QBI), making it eligible for the 20% QBI deduction. TTS is claimed by assessment; no formal election is required. However, an election is necessary for Section 475 MTM accounting. Investors are not eligible for Section 475—only TTS traders can use it.

Section 475 election deadlines for 2025:

  • Individuals – April 15, 2025

  • Pass-through entities – March 15, 2025

If a deadline falls on a weekend or federal holiday, it is extended to the next business day, by IRS rules.

If you missed the 2025 deadline, consider applying for 2026 instead. Attach the 475 election to the prior year’s tax filing, either the full tax return or extension. A 2025 Form 3115 must be filed with the 2025 tax return in 2026 as the second step of the election process. New entities can elect Section 475 within 75 days of formation, and this internal election does not require Form 3115.

Excess Business Losses Now Permanent

The excess business loss limitation (EBL) under Section 461(l) is now permanent. For 2025, thresholds are $313,000 (single) and $626,000 (married), indexed for inflation. EBL affects TTS traders who deduct business expenses on Schedule C, elect and use Section 475 ordinary losses for trading, or receive pass-through ordinary losses. Excess business losses convert into net operating loss (NOL) carryforwards, which can offset income of any kind. This permanence rejects earlier proposals that sought to limit such offsets.

Net Operating Loss (NOL) Rules Remain Unchanged

NOL rules remain unchanged under OBBBA. TCJA NOLs continue to carry forward indefinitely and are capped at 80% of taxable income. No carrybacks are allowed after 2017, except under the CARES Act, which enables NOLs arising in 2018, 2019, or 2020 to be carried back up to five years. TTS traders using Section 475 have ordinary losses and business expenses that comprise NOLs.

Qualified Business Income (QBI) Deduction Made Permanent

The 20% QBI deduction under Section 199A is now permanent under OBBBA. QBI applies to TTS traders with Section 475 ordinary income, with pass-through entities or sole proprietorships. QBI excludes capital gains, interest, dividends, and foreign exchange transactions.

For 2025, the TCJA income threshold is $394,600 (married) and $197,300 (single), which is indexed for inflation. There is also a non-indexed phase-in, phase-out range of $100,000 (married) and $50,000 (single), subject to wages and property limitations. For 2026, the income threshold will be indexed for inflation. Additionally, OBBBA increases the 2026 phase-in, phase-out range to $150,000 (married) and $75,000 (single), which will be indexed for inflation from 2026. Beginning in 2026, OBBBA also introduces a minimum QBI deduction of $400 (indexed for inflation) for taxpayers with at least $1,000 of qualified business income.

For TTS traders, an S-Corp can utilize the phase-in, phase-out because it is subject to a wage limitation. Only TTS S-Corps pay wages to their owners, whereas partnerships and sole proprietor Schedule Cs cannot pay salaries to their owners.

Bonus Depreciation Fully Restored

100% bonus depreciation is permanently reinstated for qualifying assets placed in service after January 19, 2025. Eligible property includes most new or used tangible business assets with a recovery period of 20 years or less, such as computers, office equipment, furniture, and off-the-shelf software. These assets must be used predominantly for business purposes. Real estate and intangible assets, such as goodwill, are excluded.

For traders, this provision may apply to technology infrastructure used in trading businesses, including multiple monitors, trading computers, and certain types of licensed software.

Section 174A – Internal-Use Software Expensing

Domestic research and experimental (R&E) expenses are fully deductible in the year incurred, including costs for internal-use software. Foreign-developed software must be amortized over a 15-year period.

TTS traders building custom automated trading systems (ATS) benefit, but off-the-shelf ATS without significant customization by the trader may not. TTS requires trader involvement in the trades and self-creation of the ATS system; otherwise, the trader is classified as an investor, and TCJA denies investment expense itemized deductions.

Section 179 Expensing Expanded

The Section 179 limit increases to $2.5 million, with a $4 million phaseout, both indexed. It applies to business equipment and off-the-shelf software, but it cannot generate a loss.

Bonus Depreciation vs. Section 179

  • Bonus depreciation: No cap, can create a loss.

  • Section 179: Capped and limited to income.

Tip: Use bonus depreciation for large or loss-generating purchases.

SALT Cap Raised

The state and local tax (SALT) itemized deduction cap is increased to $40,000 for 2025 (up from $10,000), with a phaseout for high-income taxpayers. The cap rises to $40,400 in 2026 and then increases by approximately 1% annually through 2029, returning to $10,000 in 2030.

There is a phaseout of the increased SALT cap benefit for modified AGI above $500,000 (or $250,000 for MFS), adjusted upward annually. The cap is reduced by 30% of the excess income above that threshold:
Phaseout amount = 0.30 × (MAGI – $500,000)
For example, on a 2025 joint return with MAGI over $600,000, you will get the minimum $10,000 deduction.

The SALT deduction includes:

  • State and local income taxes

  • Real estate taxes on personal and certain investment property

  • Personal property taxes based on value (e.g., vehicle registration fees in some states)

Taxpayers may elect to deduct state and local sales taxes instead of income taxes, but not both. Foreign income taxes may also be deducted instead of claiming a foreign tax credit. The SALT deduction does not include federal taxes, Social Security or Medicare taxes, fines, or state business taxes like B&O tax or PTET, though PTET can be deducted at the entity level.

PTET Deduction Preserved

There is an IRS-sanctioned workaround to avoid the SALT cap, and OBBBA continues to allow its use. OBBBA preserves the full pass-through entity tax (PTET) deduction for pass-through business entities, including specified service trades or businesses (SSTBs), such as trading firms eligible for TTS.

PTET payments for state and local income taxes are deducted at the entity level as business expenses, with state tax credits flowing through to owners, reducing both regular tax and AMT income.

TTS traders using S-Corps or partnerships in states such as New York, California, New Jersey, and Connecticut can continue leveraging PTET elections to bypass the federal SALT cap. Thirty-seven states offer SALT cap workaround opportunities.

AMT Rules Preserved, SALT Still Disallowed

OBBBA permanently locks in the TCJA-era AMT exemption amounts, indexed for inflation. However, it does not change the disallowance of the SALT deduction for AMT purposes.

Even with the higher $40,000 SALT deduction under regular tax, SALT remains a preference item disallowed when calculating AMTI. This means high-income taxpayers subject to AMT may not benefit from the increased SALT cap unless their AMT exposure is otherwise reduced.

Using a SALT cap workaround in a pass-through entity, you can deduct state and local taxes as PTET rather than as a SALT itemized deduction that’s not deductible for AMT.

Wash Sale (WS) Rules & Crypto

No changes to WS rules on securities. Crypto remains exempt from wash sale rules under Section 1091, as it is not treated as a security for tax purposes.

Carried Interest Rules Unchanged

Carried interest retains its current long-term capital gain treatment, provided a three-year holding period is met.

Broker Reporting & Crypto

No changes to Form 1099-B. IRS Form 1099-DA for crypto remains set for 2026 implementation.

Senior Deduction and Retirement Highlights

New senior bonus deduction: $6,000 (single ) / $12,000 (married) through 2028, phased out starting at $75,000 / $150,000, not indexed for inflation.

Retirement plan rules remain unchanged. 

Other Notable OBBBA Tax Changes

  • Standard deduction increase: Now approximately $15,750 (single) / $31,500 (married), indexed annually

  • Child tax credit: Increased to $2,200 per qualifying child

  • Trump Account: New birth-based custodial savings accounts with tax-deferred growth; annual contribution cap of $5,000 per child, indexed from 2027

  • QSBS exclusion: Increased from $10 million to $15 million

  • Auto loan interest deduction: Up to $10,000 on loans for U.S.-assembled vehicles; phased out over $100,000 / $200,000 AGI

  • Estate tax exemption: TCJA-level exemption of $13.6 million per individual extended through 2033; indexed to $15 million starting in 2026

Summary of Key OBBBA Tax Provisions

Provision Effective Date Expiration / Sunset Notes
Section 475 MTM 2025 None Remains unchanged; not mentioned in OBBBA
Excess Business Loss Limitation 2025 None Made permanent; indexed for inflation
QBI Deduction 2025 None Made permanent; phaseout thresholds indexed from 2026
Bonus Depreciation Jan 19, 2025 None Fully reinstated for qualifying assets
Section 179 Expensing 2025 None Limit increased and indexed
SALT Cap 2025 2029 (reverts 2030) Increased to $40,000; indexed; phaseouts for high income
PTET Deduction 2025 None Preserved under OBBBA
Senior Deduction 2025 2028

$6,000 / $12,000; phaseout not indexed

Conclusion

OBBBA solidifies trader-friendly provisions, including trader tax status and Section 475 MTM, QBI deductions, bonus depreciation, EBL treatment, a higher SALT cap, and PTET SALT cap workarounds, as well as pass-through entity strategies. These reforms enhance tax certainty and planning for active traders.

Take Action: Plan Your 2025 Tax Strategy Today.

Don’t wait until the last minute to take advantage of the trader-friendly reforms in OBBBA. Whether you need help with Section 475 elections, TTS qualification, entity formation planning, or SALT workaround strategies, GreenTraderTax is here to guide you.

📅 Schedule a consultation
🧾 Download Green’s 2025 Trader Tax Guide
💼 Explore our tax compliance services

Visit GreenTraderTax.com or call 888-558-5257 to get started.

Sources: Senate OBBBA text; IRS QBI FAQ; RSM US analysis; Forbes (Kelly Phillips Erb, July 4 & 5, 2025); Gibson Dunn summary; Yeo & Yeo analysis; KBKG commentary.

Author: Robert A. Green, CPA
GreenTraderTax.com

Darren Neuschwander, CPA, contributed to this blog post. 

Final Tax Reform Bill Preserves SALT and PTET Deductions for Traders and Professionals

July 3, 2025 | By: Robert A. Green, CPA | Read it on

Traders and professionals win as Congress drops PTET restrictions and expands the SALT cap in final tax deal.

After weeks of deliberation, revisions, and intense advocacy, the Senate and House have passed the final version of the One Big Beautiful Bill Act (OBBBA, H.R. 1), sending it to President Trump for signature on Independence Day. The final legislation maintains critical tax benefits for traders and other professionals by preserving access to state and local tax (SALT) deductions and the pass-through entity tax (PTET) workaround. (July 4th update: the president signed it.)

How the SALT Cap Debate Evolved

The original Tax Cuts and Jobs Act (TCJA) capped the SALT itemized deduction at $10,000 per year, causing tax increases for many professionals in high-tax states. In response, 37 states adopted PTET regimes allowing pass-through businesses—like LLCs, partnerships, and S-Corps—to deduct SALT at the entity level and bypass the cap. This workaround became vital for service businesses and traders who qualified for trader tax status (TTS).

The House version of H.R. 1 proposed increasing the SALT cap to $40,000 in 2025 with phaseouts based on income, but controversially denied PTET deductions to specified service trades or businesses (SSTBs)—including accountants, lawyers, doctors, and traders. The original Senate draft mirrored some of these restrictions, proposing a 50% cap on the PTET deduction.

The Senate Heard Our Voices

Thanks to strong feedback from CPAs, industry leaders, and affected taxpayers—including traders—Senate Republicans revised their position. On July 1, the Senate passed a new version of the bill that:

  • Increases the SALT cap to $40,000 in 2025, with 1% annual inflation indexing through 2029. The cap reverts to $10,000 in 2030.

  • Preserves full PTET deductibility for all pass-through businesses, removing earlier proposals that would have limited this benefit or excluded SSTBs.

  • Implements a phaseout of the SALT cap benefit for modified AGI above $500,000, adjusted upward annually.

This revised Senate bill retained the SALT workaround while avoiding discrimination against SSTBs, and it passed the Senate on July 1.

Final Passage by the House

On July 3, the House approved the Senate’s version without any amendments, ensuring that the bill would proceed directly to the President’s desk in time for the July 4 deadline. This legislative alignment locked in the Senate’s more favorable approach to SALT and PTET deductions.

Why This Matters to Traders and Professionals

The final legislation avoids the unfair treatment proposed in earlier versions and maintains parity between pass-throughs and C corporations. Traders with TTS who operate via PTET-eligible entities can continue to deduct state taxes at the entity level, significantly lowering their federal tax liabilities.

The AICPA welcomed this outcome, with President and CEO Mark Koziel emphasizing that removing PTET limits was vital for fairness and simplicity in the tax code. The final result ensures continuity for millions of small businesses and traders.

Final Thoughts

This legislative victory was hard-won and shows the power of informed advocacy. By preserving the SALT cap workaround and maintaining access to PTET deductions for all professions, the final tax reform bill supports a fairer and more competitive environment for traders and service businesses.

Senate Tax Bill Preserves SALT Workaround for Traders and SSTBs

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

Update July 3: Final Tax Reform Bill Preserves SALT and PTET Deductions for All Pass-Throughs

House and Senate agree on a $40,000 SALT cap for 2025 and maintain full PTET deduction access.

In a fast-track move to finalize tax reform before the July 4 recess, the House on July 3 passed the Senate’s July 1 version of the One Big Beautiful Bill (OBBBA/H.R. 1) without any further amendments, sending the legislation directly to the President’s desk for signature.

The Senate’s final version included substantial improvements to SALT and PTET provisions compared to earlier drafts and the House bill.

Final SALT and PTET Provisions Now in the Bill:

  • SALT Cap: Set at $40,000 for 2025, with 1% inflation indexing through 2029, before reverting to $10,000 in 2030. (See additional July 3 details below.)

  • PTET Deduction: All limitations removed. The bill preserves full access to the PTET SALT deduction for all pass-through entities, with no carveouts for SSTBs, ensuring parity with C corporations and reducing complexity. The SALT cap workaround survived intact. 

Good news for traders and other professionals: In order to meet the July 4 deadline, the House accepted all of the Senate’s changes without alteration. As a result, these SALT and PTET provisions—favorable to pass-throughs and SSTBs—are now part of the final legislation, pending the President’s expected signature on July 4.

Update July 1: Senate Final Tax Bill Brings Good News for Traders
Crucially, the Senate removed the 50% limitation on the PTET deduction, preserving TCJA’s current law treatment and avoiding SSTB exclusions.

The American Institute of CPAs (AICPA) has expressed strong support for the changes made in the Senate’s final version of the “One Big Beautiful Bill Act,” particularly revisions to the state and local tax (SALT) provisions. The House-passed version of the bill would have increased the SALT cap to $40,000 but phased it out at high income levels—and controversially denied the SALT PTET (pass-through entity tax) deduction to specified service trades or businesses (SSTBs), including traders eligible for trader tax status, accountants, attorneys, and doctors. These professionals would have been subject to the SALT cap at the individual level and denied the pass-through SALT cap workaround that many businesses in 37 states currently use. Under current TCJA law, all pass-through business entities can utilize a SALT cap workaround solution if their resident state offers this option and they elect to use it. 

The June 28 Senate Finance draft proposed extending the $10,000 SALT cap and introducing a new 50% limitation on the PTET deduction that would have applied to all pass-through entities, not just SSTBs.

However, in the final text passed by the Senate on July 1, key SALT changes were made:

  • The Senate-passed version would increase the SALT cap to $40,000 in 2025, $40,400 in 2026, and by an additional 1% in 2027-2029. The cap would revert to the current $10,000 in 2030.

  • The Senate-passed bill also calls for phasing out the deduction at a modified adjusted gross income of $500,000 in 2025, but would set the phaseout threshold at $505,000 in 2026 and increase it by 1% thereafter. The Senate, like the House, would not reduce the cap to below $10,000 via income-based phaseouts.

  • Crucially, the Senate removed the 50% limitation on the SALT PTET deduction, preserving TCJA’s current law treatment, allowing full deductibility of SALT PTET on state tax returns. The SALT cap workaround remains unchanged

This move was welcomed by the AICPA, which emphasized that the final bill maintains tax parity between pass-through entities and corporations, avoids complexity, and supports the competitiveness of small businesses. The organization warned that reimposing PTET limits would have introduced confusion and unfairness into the tax code.

As the bill proceeds to reconciliation, I will closely monitor the process to ensure the final legislation maintains the Senate’s more inclusive treatment of SALT and PTET deductions.

Update June 28: Senate Modifies SALT Cap and PTET Deduction in Latest Draft

On June 27, 2025, Senate Republicans released a revised version of their draft tax bill. Most notably, it increases the SALT deduction cap to $40,000 for tax year 2025, with a gradual phase-down through 2029, before reverting to the original $10,000 cap. Additionally, the Senate retains the PTET deduction for all pass-through entities, but introduces new limits: an individual’s total SALT deduction—including PTET—is capped at the sum of the standard $10,000 SALT deduction plus the greater of $40,000 or 50% of the PTET amount paid on their behalf. This still represents a more inclusive approach than the House version, which excludes SSTBs. This blog post is updated for the revised June 27 Senate bill.

Original article published June 25:
The Senate takes a more balanced approach to SALT and PTET rules, avoiding punitive carve-outs and restoring deductions for traders and service professionals.

Senate Republicans released a draft tax reform bill on June 16 that sharply diverges from the House’s approach to the state and local tax (SALT) deduction and the pass-through entity tax (PTET). Unlike the House version, which aggressively targets specified service trades or businesses (SSTBs), the Senate draft restores PTET deductions for all pass-throughs, offering welcome relief to traders, CPAs, and other professionals.

Senate Holds the Line on $10,000 SALT Cap.

The 2017 Tax Cuts and Jobs Act (TCJA) expires after 2025, caps the SALT itemized deduction at $10,000 annually. In response, 37 states enacted PTET regimes allowing pass-through entities to deduct state taxes at the entity level, effectively bypassing the SALT cap for eligible business owners. This is known as the SALT cap workaround solution. 

The House bill proposes raising the SALT cap to $40,000 with income-based phaseouts. It denies PTET deductions to SSTBs and retains the PTET deduction for non-SSTBs like manufacturers and tech companies. By contrast, the Senate draft initially kept the SALT cap at $10,000 as a placeholder.

However, the June 27 Senate revision expands the SALT deduction cap to $40,000 for 2025, with a gradual phase-down over four years, returning to $10,000 by 2030. This revision reflects negotiations aimed at easing the SALT burden in high-tax states.

PTET Deduction Extended to All Professions, with Limits

In a notable departure from the House bill, the Senate version eliminates SSTB exclusions. Instead, it applies a uniform PTET limitation: an individual’s total SALT deduction—including PTET—is capped at:

  • The standard $10,000 SALT cap plus

  • The greater of $40,000 or 50% of the PTET tax paid on their behalf.

This structure is intended to curb perceived abuses of high PTET payments while maintaining fair access to SALT relief. While more restrictive than the current law—which in many states allows near-total deduction—this framework avoids discriminatory carve-outs against service professionals. Under the Senate proposal, traders operating in PTET-eligible entities and qualifying for trader tax status (TTS) would retain access to this key deduction. However, sole proprietors, employees, and investment companies are not eligible for TTS and remain excluded.

Outlook and Next Steps

The Senate Finance Committee’s draft remains under discussion, with a floor vote anticipated as early as late June. If the Senate passes the bill, it will proceed to House-Senate reconciliation. The outcome will determine whether PTET parity and SALT deduction relief endure in the finalized legislation.

As many taxpayers discovered under the TCJA, SALT cap limitations have been a major driver of increased federal tax bills, especially in high-tax states. The Senate proposal takes a more balanced approach, extending PTET relief without penalizing service professionals.

GreenTraderTax will continue monitoring developments and advising traders and professionals on year-end planning implications.

PTET Deduction Cap (June 27 Senate Draft – Section 70601)

“An individual’s total SALT deduction, including any PTET passed-through, is limited to:

  1. The regular $10,000 cap on SALT deductions ($5,000 MFS), plus

  2. The greater of:

    • $40,000 ($20,000 for married filing separately), or

    • 50% of the total PTET paid on their behalf.

Additionally, PTETs that fail federal eligibility criteria—such as those in jurisdictions without individual income tax or with inflated entity-level rates—would be disallowed.”  (SALT Alert: Senate Tax Bill Targets SALT Cap Workarounds, Including New Limits on PTET Deductions, from Supra.com)

Darren Neuschwander, CPA, contributed to this article.

Washington’s B&O Tax Targets Traders After New Ruling

May 30, 2025 | By: Robert A. Green, CPA | Read it on

Update (Sept. 21, 2025): Washington’s Small Business B&O Tax Credit can reduce annual B&O to $0 when the net B&O tax due is under $1,920 (Annual Table 1 for Service & Other Activities). However, per RCW 82.04.080 and the WA DOR’s “Investment income” guidance, gross income includes gains realized from trading with no deduction for losses. That means high-volume traders may exceed the credit threshold even in net-loss years. Effective October 1, 2025, HB 2081 introduces tiered rates for Service & Other Activities. (We submitted a formal inquiry below to the Department of Revenue for clarification, but as of this date, no response has been received.)

Service & Other Activities B&O Rates and Credit Breakpoints

Period Gross Receipts B&O Rate Approx. Maximum Gross Receipts Fully Offset by Small Business Credit*
Before Oct. 1, 2025 All amounts 1.5% ≈ $128,000
On or after Oct. 1, 2025 Up to $1,000,000 1.5% ≈ $128,000
  $1,000,001 – $5,000,000 1.75% ≈ $110,000
  Over $5,000,000 2.1% ≈ $91,000

* These breakpoints reflect where B&O tax before credits equals $1,920, the 2025 annual Small Business Credit cutoff.

Details and Examples

Example 1: Small Business Credit wipes out tax

A Washington resident trader reports $120,000 in trading gains and $150,000 in losses during 2025. For B&O purposes, only the gains count. At the 1.5% Service & Other Activities rate, the tax before credits is $1,800. Because the net B&O tax due is below $1,920, the Small Business B&O Tax Credit fully offsets the liability, leaving no B&O tax due.

Example 2: Credit no longer applies

Another trader reports $2,000,000 in gains and $2,300,000 in losses. Again, losses do not reduce the B&O base, so the taxable gross income is $2,000,000. At the 1.5% rate, the B&O tax before credits is $30,000. The Small Business Credit phases out long before this level, so the trader owes the full $30,000 B&O tax, despite having an overall net trading loss.

Update Effective July 1, 2025

  • “The Department of Revenue is offering a temporary expanded Voluntary Disclosure Program under ESSB 5167. For more information, including FAQs about this program, see our Investment Income Voluntary Disclosure Program webpage.
  • Effective Jan. 1, 2026, Engrossed Substitute House Bill (ESHB) 2081 addresses the business and occupation (B&O) tax deduction for certain investments, including incidental investment income and investment income for qualified person(s).”

Original Post May 30, 2025

With the Antio court decision and HB 2081 now law, day traders may be pulled into Washington’s business tax system.

Before tax year 2025, traders considered their personal and trading entity accounts exempt from Washington State Business & Occupancy (B&O) tax, a revenue-based tax on businesses.

What’s New

Lots have changed, and we are tackling the potentially harmful implications for traders. Two significant events happened: the Antio court decision of October 24, 2024, and House Bill 2081, which was signed into law on May 20, 2025. The Washington Supreme Court ruled in Antio, LLC v. Washington State Department of Revenue that the investment income deduction under RCW 82.04.4281 applies only to income incidental to the taxpayer’s main business activity. Antio eliminated the investment income deduction for entities if investment income was more than 5% of net income. For a trading entity, it’s 100%. HB 2081 confirmed Antio and made exemptions for Family Investment Vehicles and Collective Investment Vehicles.

We have some significant questions. Please take a look at our letter to DOR below. In summary, do traders using a personal account and Trader Tax Status trigger B&O tax? Can trading entities qualify for a Family Investment Vehicle or Collective Investment Vehicle exemption?

The Washington Department of Revenue (DOR) has taken a firm stance on B&O tax, which could affect active traders residing in the state.

Strategy Considerations

Washington-based traders should carefully evaluate whether to elect Trader Tax Status (TTS) and Section 475 MTM, both of which offer federal tax advantages but may affect B&O tax exposure. For example, using Section 475 means gains and losses are considered ordinary income, potentially strengthening the case that net income—not gross gains—should apply for B&O tax purposes, if applicable, and we hope it’s not.

Prior postures asserting that the Washington B&O tax doesn’t apply to trading entities or to individual traders may have been defensible in prior years, but with recent appeals rulings and interpretations, it’s time to reassess. The DOR has promised additional guidance, which traders should monitor closely.

Family Investment Vehicle (FIV) Exemption — Do Traders Qualify?

Under HB 2081, a Family Investment Vehicle (FIV) must be:

  • An estate or trust (inter vivos or testamentary),

  • With beneficiaries limited to family members or nonprofits, or a qualified tuition program.

This definition does not include family offices or for-profit trading entities. Accordingly, a typical trading entity, including a husband-wife LLC or S-Corp, does not qualify for the FIV exemption. These entities are neither estates nor trusts, nor do they meet the statutory beneficiary restrictions.

Collective Investment Vehicle (CIV) — What Qualifies?

HB 2081 defines Collective Investment Vehicles (CIVs) with the following requirements:

  • Derive at least 90% of gross income from investment income;

  • Have multiple investors, including at least one unrelated person;

  • Be managed by an external investment advisor or fund manager;

  • Hold only passive investment assets;

  • Be organized and operated as an investment fund for the benefit of investors.

CIVs are intended for pooled vehicles such as hedge funds, private equity funds, and mutual funds. These entities typically meet the requirements.

By contrast, a for-profit trading entity operating with trader tax status does not qualify for the CIV exemption. It generally lacks unrelated investors and does not appoint an outside fund manager. It is not operated as a pooled investment vehicle for third-party beneficiaries.

Enactment of HB 2081

On May 20, 2025, Governor Ferguson signed HB 2081 into law, which enacts sweeping changes to Washington’s B&O tax regime. Key provisions include:

  • Permanent rate increases for several classifications.

  • A new progressive rate structure for service-based businesses.

  • A 0.5% B&O surcharge beginning in 2026 on companies with $250 million+ in taxable income.

  • New exemptions for Collective Investment Vehicles (CIVs) and Family Investment Vehicles (FIVs), with strict eligibility standards.

Traders and investors must now determine how this law impacts their specific tax obligations, especially if they are using trading entities.

B&O Tax Rate Overview

Washington’s B&O tax applies to gross receipts, not net income. The applicable rates vary by business classification:

  • Service and other activities (which may include investment income entities):

    • Previous rate: 1.5%

    • Under HB 2081:

      • 1.5% for businesses under $1 million in gross receipts

      • Ranges up to 2.1% for businesses exceeding $25 million

  • A 0.5% surcharge applies beginning in 2026 for businesses with over $250 million in WA gross receipts.

These rates may apply to trader entities not qualifying for FIV or CIV exemptions. Importantly, the law does not allow deductions for trading losses, unless otherwise clarified.

It’s not clear if DOR considers frequent traders to be engaged in business and subject to the B&O tax. We need them to answer our below questions.

Can Traders Offset Trading Gains with Trading Losses?

If B&O tax applies to traders then what is the taxable amount? According to RCW 82.04.080, gross income of the business includes gains realized from trading in stocks, bonds, or other evidences of indebtedness, interest income, dividends, and other investment-related income without any deduction for losses.

A literal reading of this rule indicates that only trading gains are included—not trading losses. This implies that a trader with overall net yearly losses must still pay the B&O tax on gross trading gains.

A similarly situated Washington trader could attempt to assert that their net trading results—not just trading gains—better reflect their business gross income for B&O tax purposes. This argument may hold more weight if the trader’s investment activity is their primary business, and if their situation is more akin to a dealer in securities who typically reports net revenue. However, traders don’t have customers, whereas dealers do.

Gross receipts on services should equate with net trading gains, calculated as gross proceeds on securities trades minus purchases of securities sold. For futures, net trading gains are reported on Form 1099-B. A trader can have significant proceeds and yet have a net trading loss.

Letter to the Washington Department of Revenue (DOR)

We submitted the following formal inquiry to the Department of Revenue, requesting clarification. As of September 21, 2025, we have not received a response.

Washington B&O Tax: Does It Apply to Traders?

Dear DOR, kindly answer the following B&O tax questions. As background, kindly see my blog post on GreenTraderTax.com dated May 30, 2025.

  1. Confirm that persons not engaged in business are not subject to B&O tax on investing income. From the DOR website: “Persons who are not engaging in business are not subject to B&O tax on their income earned from investing. This category includes individuals who are not engaged in business and who invest their own personal assets.”

  2. Confirm that persons not engaged in business are not subject to B&O tax on trading gains. Trading is short-term oriented, whereas investing has a longer-term focus.

  3. What does it mean for a person to be “engaged in business”? If a trader does not earn revenue from investment advice, has no brokerage license, and is not a dealer, what else qualifies for a business?

  4. Does DOR recognize the IRS classification for “trader in securities” (see IRS Tax Topic 429)? We call it “trader tax status” (TTS).

  5. Is a TTS trader deducting expenses on Schedule C and using Form 4797 engaged in business for B&O purposes?

  6. Does a trading or investment entity owned by a trader with no outside investors, whether using TTS or not, qualify for a FIV or CIV exemption from B&O tax?

  7. If subject to B&O tax, should the tax base be net trading gain/loss? Does the law truly disallow losses? A trader might trade one security hundreds of times per day, and the activity only makes sense when trading gains are combined with losses.

  8. Can you confirm B&O tax applies to net gains (proceeds minus cost basis), not just gross proceeds?

These answers are urgently needed, as traders have moved to WA seeking lower tax burdens. If B&O tax applies to their trading, they must be warned.

Sincerely,
Robert A. Green, CPA
CEO, GreenTraderTax.com
Forbes Contributor

What You Can Do

  • Forward this blog post to your tax advisor or Washington State legislator.

  • Contact the Washington Department of Revenue and request published guidance for individuals trading for their own account or through an entity solely used for trading.

  • Share this post with your trading community to raise awareness of these new tax risks.

Darren Neuschwander, CPA, and Adam Manning, CPA, contributed to this blog post. 

Resources

  • RCW 82.04.080 – Gross income of the business defined

    Washington law defines gross income and explicitly disallows deductions for losses.

    RCW 82.04.080

  • WA Department of Revenue – Investment income

    Explains that gross income includes gains from trading, with no deduction for losses.

    DOR: Investment income

  • WA Department of Revenue – Small Business B&O Tax Credit

    Annual tables showing the $1,920 cutoff for Service & Other Activities.

    DOR: Small Business Tax Credit Tables

  • WA Department of Revenue – B&O tax rate changes (HB 2081)

    Special notice on the new tiered rates effective October 1, 2025.

    DOR: B&O tax rate changes

  • Antio LLC v. Department of Revenue (Wash. Sup. Ct. Oct. 24, 2024)

    Case holding that investment income is not automatically deductible under the “amounts derived from investments” exemption.

    Antio case summary – PwC

    Antio case summary – CBIZ

House Bill Targets SALT Cap Workarounds and PTET Deduction for Traders and Service Professionals

May 29, 2025 | By: Robert A. Green, CPA | Read it on

A Renewed Blow in the SALT Wars and a Wake-Up Call for High-Income Professionals

My parents once gave me a binary career choice: become a doctor or a lawyer. I took the road less traveled and became a CPA. While they respected my choice, none of us anticipated that the government would gradually single out respected service professionals—doctors, lawyers, accountants, financial advisors, and traders—for unfavorable treatment under the tax code.

This trend began in earnest with the 2017 Tax Cuts and Jobs Act (TCJA). While the TCJA created a 20% qualified business income (QBI) deduction for pass-through entities, it excluded “specified service trades or businesses” (SSTBs) above a certain income threshold. Professionals in health, law, financial services, consulting, and accounting faced income caps on the QBI deduction. In contrast, manufacturers, tech companies, and other non-SSTBs had no income cap; however, wage and property limits apply above an income threshold.

The House Bill’s New Blow to Service Professionals

On May 22, 2025, the House of Representatives passed “The One, Big, Beautiful Bill,” a sweeping tax reform proposal to renew and reshape the TCJA, which will mostly expire at the end of 2025. Buried in the new legislation is a provision that targets the same SSTBs once again—this time by stripping them of the valuable Pass-Through Entity Tax (PTET) deduction, which achieved a SALT cap workaround.

Under current law, the PTET election allows owners of pass-through entities to bypass the $10,000 federal cap on state and local tax (SALT) deductions by paying those taxes at the entity level. This workaround has been critical for high-income professionals in high-tax states like New York, California, and New Jersey.

But under the House Bill, individuals engaged in SSTBs, including:

  • Health, law, accounting, and actuarial science
  • Performing arts, consulting, athletics
  • Financial services, brokerage, investing, and trading
  • Any business where the principal asset is the reputation or skill of its owners or employees

…would no longer be eligible for the PTET deduction.

SALT Deduction Cap Adjusted

The House bill also proposes a permanent increase in the SALT (State and Local Tax) deduction cap, raising it from $10,000 to $40,000 starting in 2025. However, this expanded deduction would be gradually phased out for higher-income taxpayers.

According to the bill, the phase-out begins for single filers with modified adjusted gross income (MAGI) above $250,000 and for married joint filers above $500,000. The deduction is reduced by 20% for every $50,000 of income above these thresholds for single filers, and every $100,000 for joint filers. Once fully phased out, the cap returns to $10,000 for the highest earners.

While this increase may offer modest relief to middle- and upper-middle-income taxpayers in high-tax states, it does little for high-income professionals, particularly those already excluded from PTET deductions and who trigger AMT. The phase-out structure ensures that the most substantial SALT benefits remain out of reach for many service professionals and investment entities.

Will the AMT Make a Comeback?

The House bill includes a provision to permanently extend the increased Alternative Minimum Tax (AMT) exemption amounts and phase-out thresholds originally enacted under the TCJA. This move aims to prevent more taxpayers from falling into the AMT once the current provisions expire after 2025.

Before the 2017 TCJA, many upper-income taxpayers were pushed into the  AMT due to significant state and local tax deductions, which are not deductible for AMT purposes. The TCJA temporarily raised AMT exemption amounts and roughly doubled the standard deduction, shielding many from this parallel tax calculation.

However, with the new House bill aiming to renew and revise the TCJA framework, there’s a growing likelihood that AMT could once again become a significant factor in federal tax planning. Suppose key deductions like PTET are eliminated and SALT caps are phased out at higher incomes. In that case, more taxpayers—especially those in high-tax states—may find themselves subject to AMT and income tax liability, even without any meaningful change in their economic reality.

What The SALT Cap Workaround Means for Traders and Fund Managers

This change would remove a vital federal tax benefit for traders, asset managers, and proprietary trading firms, especially those qualifying for Trader Tax Status (TTS) and operating through S-Corps or partnerships. According to Proskauer Tax Talks, the denial of PTET deductions applies broadly to those trading or dealing in securities, partnership interests, or commodities.

Congress is effectively extending the SSTB income cap logic from the QBI deduction to the PTET deduction. That’s a punitive shift, taking what was once a SALT cap workaround solution and denying it based on your profession.

Widespread Use of PTET SALT Cap Workarounds

As of early 2025, 36 states and New York City have enacted Pass-Through Entity Tax (PTET) regimes to provide a workaround to the federal $10,000 cap on state and local tax (SALT) deductions. These laws allow pass-through entities—such as S-Corps and LLC/partnerships—to pay state income taxes at the entity level, enabling owners to deduct those taxes as business expenses from gross income on their federal returns. The entity Schedule K-1 passes through a state tax credit. The IRS authorized this approach in Notice 2020-75.

However, the availability and longevity of PTET programs vary by state. Some, like California, Illinois, and Michigan, have provisions set to expire after the 2025 tax year unless extended. This uncertainty, combined with the proposed federal restrictions on SSTBs, makes PTET planning especially urgent for traders and investment professionals.

The Senate Is Next—Time to Mobilize

The bill now moves to the Senate, where revisions are expected. However, if these PTET and SALT provisions are implemented, they will majorly impact 2025 tax planning. Asset managers and active traders may face larger federal tax bills, especially in states implementing PTET regimes to protect pass-through entities from the SALT cap.

“Based on recent articles about what the Senate may do with this bill, including completely rewriting it, the outcome is unpredictable at this time,” says Darren Neuschwander, CPA.

We’re watching this closely and will provide further updates as the legislation develops. If enacted, this provision will be a turning point in how the federal tax code treats service professionals, especially those in the trading and investment management space.

Darren Neuschwander, CPA, contributed to this blog post. 

 

2024 Year-End Tax Planning Strategies For Active Traders And Investors

October 22, 2024 | By: Robert A. Green, CPA | Read it on

Don’t wait until tax time in April; arrange tax savings before year-end. Learn about deferring income, accelerating deductions, tax-loss selling, avoiding wash sale losses, paying estimated taxes, S-Corp payroll with health and retirement benefits, SALT cap workaround strategies for pass-through entities, and other tax-saving strategies. 

Tax planning for traders at year-end 2024 should be similar to 2023, as tax law is mostly the same in 2024. However, it will be different for 2025 year-end planning.

Most tax provisions for individuals in the 2017 Tax Cuts and Jobs Act (TCJA) expire on Dec. 31, 2025. TCJA temporarily reduced income tax rates, roughly doubled the standard deduction, restricted itemized deductions, introduced a state and local tax (SALT) cap and the 20% qualified business income (QBI) deduction on pass-through entities, revised NOL rules, but permanently reduced the corporate tax rate to 21%. Oddly, the corporate tax relief is permanent, and the individual provisions are temporary, which was done to meet budget reconciliation requirements.

The 2025 president and Congress will discuss significant tax changes during 2025, so year-end tax planning in 2025 may differ substantially from 2024. The election results of Nov. 5, 2024, will give telltale signs of tax changes coming in 2026.

Recent tax acts, including the TCJA, 2020 CARES, 2019 and 2022 SECURE, and 2022 IRA, didn’t alter trader tax law, including trader tax status (TTS), Section 475 MTM accounting, wash-sale losses on securities, or the tax treatment on financial products, including futures (Section 1256 contracts) and cryptocurrencies (intangible property). Neither presidential candidate proposed changes to TTS-related benefits.

For year-end planning, it’s helpful to consider the IRS’s annual inflation adjustments in income and capital gains tax brackets, income thresholds, retirement plan contribution limits, standard deductions, etc. See “IRS provides tax inflation adjustments for tax year 2024” and “IRS releases tax inflation adjustments for tax year 2025.” The inflation-adjusted amounts increase by approximately 2.8% from 2024 to 2025, after a rise of 7.1% from 2023 to 2024. 

Trader tax status (TTS) constitutes business expense treatment and unlocks meaningful tax benefits for active traders who qualify. The first step is to determine eligibility. If you qualify for TTS, you can claim some tax breaks, such as business expense treatment, after the fact. TTS traders can also elect and set up other tax breaks—like Section 475 MTM, employee benefit plans (health and retirement), and a SALT cap workaround—on a timely basis. See my golden rules for TTS qualification. 

DEFER INCOME AND ACCELERATE TAX DEDUCTIONS

If you are in a reasonably high tax bracket for 2024, consider deferring income and accelerating tax deductions to take advantage of a one-year deferral of tax payments.

Income deferral could be suitable for a trader who expects a lower income next year due to retirement, a job change, or other circumstances. For example, a trader may leave employment to pursue full-time trading in 2025. Consider deferring bonuses at work, respecting the constructive receipt of income rule, which means you cannot turn your back on an income payment.

Income deferral reduces AGI and might unlock other tax breaks based on AGI thresholds. Including the 3.8% net investment income tax, qualified business income deduction, non-deductible Roth IRA contributions, deductible traditional IRA contributions, child tax credits, education tax credits, electric vehicle (EV) tax credits, and student loan interest deductions.

Traders eligible for TTS in 2024 should consider accelerating trading business expenses before year-end, such as purchasing computer equipment using tangible property expense and first-year (immediate) expense using Section 179 depreciation.

Consider delaying profitable investments’ realization (sales) to defer capital gains taxes. It also might avoid the Affordable Care Act’s (ACA) 3.8% net investment income tax (NIIT) over the MAGI threshold of $200,000 for single filers, $250,000 for married filing jointly, and $125,000 for married filing separately. The IRS does not make annual inflation adjustments for these ACA NIIT thresholds.

Tax loss harvesting: Consider accelerating the sale of losing investments to reduce capital gains or to use the $3,000 capital loss limitation against ordinary income. Net capital losses over this $3,000 allowance may be carried over to subsequent tax years to offset capital gains but not Section 475 ordinary income trading gains. Trading capital gains and losses are combined on Schedule D with investment capital gains and losses.

AVOID YEAR-END WASH SALE LOSSES

Avoid triggering year-end wash sale (WS) losses on securities, which can defer capital losses to subsequent tax years and raise current-year tax liability.

Day and swing traders inevitably trigger many WS loss adjustments amounting to tens or hundreds of thousands of dollars. A WS occurs when you take a loss on a security and repurchase it within 30 days (after or before). For example, sell 100 shares of XXX equity on Dec. 15, 2024, for a $10,000 capital loss and repurchase that same equity position on January 5, 2025. That’s a WS; the $10,000 loss is deferred at year-end 2024 and added to the repurchased position’s cost basis.

WS during the year can be okay if a trader avoids WS loss deferral at year-end. For example, assume a trader has many WS losses on the stock symbol AAPL during the year. If they sell their entire AAPL position by year-end and wait 31 days in Jan. 2025 to repurchase AAPL equity or the equity options on AAPL, there will be no open WS loss deferral on AAPL at year-end 2024.

It can be different with investment positions. Suppose an investor sells an unprofitable AAPL investment position in early Oct. 2024 and triggers a WS when repurchasing AAPL within 30 days in late Oct. 2024 as an investment position. They might want to retain that now profitable AAPL investment position at year-end 2024, which has embedded the WS loss as an additional cost basis. That counts as WS loss deferral, too.

IRS rules require taxpayers to report WS loss adjustments on securities based on substantially identical positions across all accounts, including IRAs. Substantially identical means equity, an option on that equity (equity option), and those options at different exercise dates. 

Suppose a trader sells AAPL for a taxable account loss and repurchases that position in their IRA within 30 days. In that case, it triggers a permanent WS loss in the taxable account, as there is no way to add the WS loss to the cost basis in an IRA account. An IRA account does not trigger WS losses on its account.

The IRS has different WS reporting rules for brokers on Form 1099-B versus those for taxpayers. That has caused significant confusion among taxpayers and tax preparers. Brokers report WS losses on 1099-Bs on identical positions per taxable account. AAPL is identical to AAPL stock only but substantially identical to AAPL options. It would be unreasonable to ask Schwab to combine WS loss reporting with Interactive Brokers. Brokers won’t even calculate WS losses across multiple accounts with the same broker.

This is why active securities traders should use a trade accounting program to identify potential WS loss problems across all their accounts, especially going into year-end, so they have time to avoid year-end deferral of capital losses.

WS losses might be preferable to capital loss carryovers at year-end 2024 for TTS traders. A Section 475 election in 2025 converts year-end 2024 WS losses on TTS positions (not investment positions) into ordinary losses in 2025. That’s better than a capital loss carryover into 2025, which might give you pause when making a 2025 Section 475 election (due April 15, 2025). You want a clean slate with no remaining capital losses before electing Section 475 ordinary income and loss.

There are other ways to avoid WS losses:

  • TTS traders can elect Section 475 MTM by April 15 of the current tax year, and 475 trades are not subject to WS losses. It’s too late to elect 475 for 2024.
  • Absorb a WS loss with a subsequent gain on a substantially identical position.
  • Trade futures (Section 1256 contracts) in Jan. 2025, which breaks the chain on the securities traded with capital losses in Dec. 2024.
  • Trade different ETFs in Jan 2025 than in Dec 2024. For example, numerous ETFs track the S&P 500, which are not substantially identical.

TAX EFFICIENT SALES & ACCOUNTING METHOD

If you want to sell some of your portfolios, consider taking long-term capital gains, which are subject to lower tax rates (0%, 15%, and 20%), rather than short-term capital gains, which are taxed at ordinary rates as high as 37%.

That might require using the “specific identification accounting method” vs. first-in-first-out. (See FIFO vs. Specific Identification Accounting Methods.)

0% long term capital gains rate: If you have a low income, consider realizing long-term capital gains at the 0% rate by selling open positions for over 12 months. The (long-term) capital gains tax rates are 0%, 15%, and 20%. 

The 2024 zero capital gains rate applies to singles with taxable income under $47,025, married couples filing jointly under $94,050, and heads of household under $63,000.

Caution: If you go $1 over the zero-rate bracket, all long-term gains are subject to the 15% capital gains rate. This rate doesn’t work like progressive marginal ordinary tax brackets.

See the 2024 and 2025 capital gains tax brackets and more at https://taxfoundation.org/data/all/federal/2024-tax-brackets/  and https://taxfoundation.org/data/all/federal/2025-tax-brackets/

STRADDLES AND CONSTRUCTIVE SALE RULES

The IRS has rules to prevent income deferral and loss acceleration in offsetting positions that lack sufficient economic risk. These rules include straddles, the constructive sale rule, and shorting against the box.

Selling the losing legs on a complex options trade with offsetting positions can trigger the straddle loss deferral rules.

In the old days, owners stored stock certificates in safe deposit boxes. They could borrow and sell securities, but not those stored in their box — hence the moniker, “short sale against the box.” It became a popular tax shelter to defer capital gains taxes.

The Taxpayer Relief Act of 1997 mostly closed the deferral loophole by adding Section 1259, Constructive Sales Treatment for Appreciated Financial Positions. Before these changes, a trader could own security A with a significant unrealized capital gain and short it against the box before year-end to freeze the capital gain economically but defer its realization until the following year.

Exception: A trader can still achieve tax deferral on an open short against the box position at year-end if they buy to cover the open short position by Jan. 30 and leave the long position available throughout the 60 days beginning on the date they close the transaction. So, there is an economic risk. Please see an example from Pub. 550 Investment Income and Expenses, Short Sales.

The constructive sale rules apply to substantially identical properties, which include equities, equity options (including put options), futures, and other contracts. For example, Apple’s equity is substantially identical to Apple’s call-and-put equity options. Traders use various financial products and may inadvertently trigger Section 1259 constructive sales. Report gains on constructive sales, not losses.

Brokers only report constructive sales on appreciated positions on Form 1099-Bs if you request it quickly. Otherwise, traders need to make manual adjustments on Form 8949.

See our Tax Center on Short Selling.

ACCELERATE INCOME AND DEFER CERTAIN EXPENSES

A TTS trader with significant Section 475 ordinary losses should consider accelerating income. Try to advance enough income to use the standard deduction and take advantage of lower marginal tax brackets. Stay below the threshold for unlocking various AGI-dependent deductions and credits.

A new trader in 2024 may have a low trading income after leaving a high-paying job at the end of 2023. They expect to be in a higher tax bracket in 2025, so they accelerate their income to 2024 to take advantage of lower tax brackets.

EXCESS BUSINESS LOSSES AND NET OPERATING LOSSES

TTS traders with a Section 475 election might incur ordinary business losses for 2024. Before the TCJA commenced in 2018, a TTS/475 trader could carry back a net operating loss (NOL) for two years, generating an immediate tax refund. TCJA repealed NOL carrybacks (except for farmers) and limited NOL carryforwards to 80% of the subsequent year’s taxable income.

The TCJA introduced an excess business loss (EBL) limitation. Excess losses over the limit are carried forward as NOLs. The EBL threshold is $610,000 for joint filers in 2024 ($626,000 in 2025) and $305,000 ($313,000 in 2025) for all other filers.

The 2020 pandemic-relief CARES Act suspended the TCJA’s EBL and NOL changes for 2018, 2019, and 2020 and allowed five-year NOL carrybacks (e.g., a 2020 NOL carryback to 2015). The TCJA’s EBL and NOL carryforward rules apply for tax years 2021 through 2028. Interim tax legislation extended the expiration date by three years for EBL and NOL changes only.

ROTH IRA CONVERSION

Evaluate changing a traditional IRA or 401(k) into a Roth IRA. Distributions from a standard retirement plan are taxed as ordinary income (not capital gains), whereas with a Roth IRA, distributions in retirement years are tax-free.

On the conversion date, the market value of the traditional retirement account is taxed at ordinary rates. Subsequent growth in the Roth IRA account is tax-free. If your retirement portfolio is depressed, you might enjoy recovery of values inside a Roth IRA.

The TCJA repealed the recharacterization option, so you can no longer reverse the conversion if the plan assets decline. Since major stock indexes are currently at record highs, conversion may not be wise.

Generally, there’s a 10% excise tax on early withdrawals from retirement plans before age 59½. With a Roth IRA conversion, you can avoid excise tax by paying conversion taxes outside the Roth plan. Roth IRA conversions have no income limit, unlike regular Roth IRA contributions. 

NET INVESTMENT INCOME TAX

Investment fees and expenses are not deductible when calculating net investment income (NII) for the Affordable Care Act’s (ACA) 3.8% net investment tax (NIT). NIT only applies to individuals with NII and modified adjusted gross income (AGI) exceeding $200,000 single, $250,000 married filing jointly, or $125,000 married filing separately. The IRS does not index these ACA thresholds for inflation. NII includes portfolio income, capital gains, and Section 475 ordinary income.

BUSINESS EXPENSES AND ITEMIZED VS. STANDARD DEDUCTION

Business expenses: TTS traders are entitled to business and home office deductions from gross income. The home office deduction requires income, except for the mortgage interest and real property tax portion.

TTS traders can deduct tangible personal property like a computer, up to $2,500 per item, providing the taxpayer files a Sec. 1.263(a)-1(f) safe harbor election with the tax return. They can also use Section 179 first-year expense, bonus, or regular depreciation on computers, equipment, furniture, and fixtures (over $2,500 per item). Traders with TTS in 2024 may consider going on a shopping spree before Jan. 1, 2025. There is no sense in deferring TTS expenses because you cannot be sure you will qualify for TTS in 2025.

Employee business expenses: Ask your employer if they have an accountable plan for reimbursing employee business expenses. You must “use it or lose it” before year-end. TCJA suspended unreimbursed employee business expenses and miscellaneous itemized deductions through tax year 2025. TTS S-Corps should use an accountable plan to reimburse employee business expenses since the trader/owner is its employee.

Unreimbursed partnership expenses: Partners in LLCs taxed as partnerships can deduct unreimbursed partnership expenses (UPE). That is how they usually deduct home office expenses. UPE is more convenient than an S-Corp accountable plan because the partner can arrange the UPE after year-end. The IRS doesn’t want S-Corps to use UPE.

SALT cap: TCJA capped itemized deductions for state and local income, sales, and property taxes (SALT) at $10,000 per year ($5,000 for married filing separately) and did not index it for inflation. About 36 states enacted SALT cap workaround laws. Search “(Your state) SALT cap workaround” to learn the details. 

Most states follow a blueprint approved by the IRS. Generally, elect to make pass-through entity (PTE) payments on a partnership or S-Corp tax return filed by your business. It doesn’t work with a sole proprietorship filing a Schedule C. PTE is a business expense deduction shown on the state Schedule K-1. Most states credit the individual’s state income tax liability with the PTE amount or most of it. Essentially, you convert a non-deductible SALT itemized deduction (over the cap) into a business expense deduction from gross income. Act well before year-end; otherwise, you might delay the benefit to next year.

TCJA’s SALT cap expires at the end of 2025. California stated it would end its SALT cap workaround if Congress let the SALT cap expire. Look into how your state would handle it.

Investment fees and expenses: The TCJA suspended all miscellaneous itemized deductions subject to the 2% floor, including investment fees and costs. An example is fees paid to an RIA for managing investments. Brokerage commissions are not investment fees; commissions are included in capital gains, deducted from proceeds, and added to the cost basis.

TCJA did not suspend an itemized deduction for investment-interest expenses limited to investment income, with the excess as a carryover.

Standard deduction: The TCJA roughly doubled the 2018 standard deduction and suspended and curtailed several itemized deductions. For 2024, with an inflation adjustment, the IRS increased the standard deduction to $29,200 for married couples filing jointly, $14,600 for single/married couples filing separately, and $21,900 for heads of household. There is an additional $1,550 for married seniors and $1,950 for unmarried seniors.

Many taxpayers use the standard deduction. For convenience, some taxpayers may feel inclined to stop tracking itemized deductions because they figure they will use the standard deduction. Don’t overlook the impact of itemized deductions on state tax filings, where you might get some tax relief.

CHARITABLE CONTRIBUTIONS

In 2024, there will be no non-itemized above-the-line deduction for charitable contributions, as there was temporarily in recent years. Individuals who want to deduct charitable contributions must use itemized deductions.

Individuals may itemize contributions to charitable organizations up to a percentage of AGI. Through 2025, the rate is 60% for cash contributions and 30% for noncash donations.

You may also donate appreciated securities to charity. This will give you a charitable deduction at the fair market value and avoid capital gains taxes. (Billionaires use this strategy, and you can use it.)

Consider a charitable remainder trust to group philanthropic contributions for itemizing deductions and taking a standard deduction in off-years. A donor-advised fund provides similar flexibility.

Qualified charitable distributions (QCDs) allow individuals aged 70 1/2 or older to donate directly from their traditional IRA to eligible charities. The QCD distribution is excluded from taxable income, and there is no charitable deduction. The 2024 maximum QCD limit is $105,000 per person. 

HEALTH SAVINGS ACCOUNT

A trader can take an AGI deduction for a contribution to a health savings account (HSA) without qualifying for TTS, having a source of earned income, or self-employment income.

A high-deductible health plan (HDHP) is required for an HSA contribution. The annual contribution to an HSA for 2024 is limited to $4,150 for an individual HDHP and $8,300 for a family HDHP. Individuals aged 55 or older can make a catch-up contribution of $1,000.

ESTIMATED INCOME TAXES

Taxpayers should pay federal and state estimated taxes owed by Jan. 15, 2025, and the balance by April 15, 2025. Those who have reached the SALT cap don’t need to prepay 2024 state-estimated income taxes by Dec. 31, 2024 (a strategy before TCJA).

Many traders skip making quarterly estimated tax payments on capital gains or 475 income during the year, figuring they might incur trading losses later in the year. They can catch up with the Q4 estimate due by Jan. 15, 2025, but might still owe an underpayment penalty for Q1 through Q3 quarters. Some rely on the safe harbor exception to cover their prior year’s taxes. (See Traders Should Focus On Q4 Estimated Taxes Due January 16.)

The underestimated tax penalty is higher in 2024 than in prior years, at approximately 8%.

ADJUST WITHHOLDING

Employees should consider withholding additional taxes on year-end paychecks. This helps avoid underpayment penalties, as the IRS treats wage withholding as being made throughout the year. This loophole applies to officers and owners of TTS S-Corps.

20% DEDUCTION ON QUALIFIED BUSINESS INCOME

In 2018, 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 be eligible for a 20% deduction on qualified business income (QBI).

Because TTS traders are considered a “specified service trade or business” (SSTB), taxable income above the following threshold is not deductible: $383,900/$191,950 (married/other taxpayers) for 2024, and $394,600/$197,300 (married/other taxpayers) for 2025.

There is also a phase-out range above the threshold of $100,000/$50,000 (married/other taxpayers). Within this range, the W-2 wage and property basis limitations apply. TTS traders with an S-Corp usually have wages, whereas sole proprietor traders do not.

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

Try to manage your AGI to stay within the QBI threshold.

S-CORP OFFICER COMPENSATION

TTS traders use an S-Corp to arrange health insurance and retirement plan deductions. These deductions require earned income or self-employment income. A TTS S-corp salary is earned income, unlike unearned income trading gains.

S-Corps pay officer compensation in conjunction with employee benefit deductions through payroll tax compliance done before year-end 2024. Otherwise, traders miss the boat.

TTS is necessary since an S-Corp investment company cannot have tax-deductible wages, health insurance, or retirement plan contributions. A trading S-Corp is not required to have “reasonable compensation,” so a TTS trader may determine officer compensation based on how much to reimburse for health insurance and how much they want to contribute to a retirement plan. Sole proprietors and partnership TTS traders cannot pay salaries to 2% or more owners; hence, they need an S-Corp.

S-Corp wages impact the SALT cap workaround, as it hinges on net income after wages. If you fall into the QBI phase-out range, wages are required to increase the QBI deduction. This decision-making has many moving levers and parts, so consult your CPA for year-end tax planning early in December. Payroll planning and execution take some time, so act well before the year-end.

S-CORP HEALTH INSURANCE

S-Corps may deduct health insurance for only the months it was operational and qualified for TTS. Employer-provided health insurance, including Cobra, is not deductible.

The S-corp reimburses the employee/owner through the accountable reimbursement plan before year-end. The company adds the health insurance reimbursement to taxable wages but does not withhold Social Security or Medicare taxes from that portion of W-2 compensation. The officer/owner takes an AGI deduction for health insurance on their tax return. It’s quirky.

S-CORP RETIREMENT PLAN CONTRIBUTION

TTS S-Corps can unlock a retirement plan deduction by paying sufficient officer compensation in Dec. 2024 when results for the year are evident. Net income after deducting wages and retirement contributions should be positive. Creating a salary that generates losses is inappropriate.

Establishing a Solo 401(k) retirement plan with a financial intermediary is necessary before the year-end. The plan includes the 100%-deductible elective deferral up to a 2024 maximum of $23,000 (or $30,500 if aged 50 or older with the $7,500 catch-up provision) on the Dec. 2024 paycheck and annual W-2. You have one month to pay the elective deferral into the Solo 401(k) plan in Jan. 2025.

You can pay the 25%-deductible profit-sharing plan (PSP) portion of the S-Corp Solo 401(k) up to a maximum of $46,000 by the 2024 S-Corp tax return due date, including an extension, which means Sept. 15, 2025. For 2024, the maximum PSP contribution requires wages of $184,000 ($46,000 divided by a 25% defined contribution rate).

Tax planning calculations will show the various projected outcomes of income tax savings vs. payroll tax costs. Paying into social security builds retirement benefits, as the Social Security Administration (SSA) looks back at your highest 35 years of earnings (salaries) when calculating your retirement benefit.

Consider a Solo 401(k) Roth for the elective-deferral portion only. The contribution is not deductible, but the contribution and growth within the Roth are permanently tax-free. Traditional plans have a tax deduction upfront, and all distributions are subject to ordinary income taxes in retirement.

Traditional retirement plans have required minimum distributions (RMD) by age 72 (73 if you reach age 72 after Dec. 31, 2022), whereas Roth plans don’t have RMD.

Distributions from traditional retirement plans generate ordinary income, so manage that lever well to achieve AGI thresholds.

HAVE YOUR NEW ENTITY READY ON JAN. 1, 2025

If you missed employee benefits (health insurance and retirement contributions) in 2024, consider an LLC with an S-Corp election for the tax year 2025. Or you may want a spousal-member LLC taxed as a partnership for 2025 to maximize the SALT cap workaround and segregate trading from investing.

Consider the following plan to be ready to trade on the first trading day of Jan. 2025. Form a single-member LLC in mid-Dec. 2024, obtain the employee identification number (EIN), and open the LLC brokerage account before year-end to be ready to trade as of Jan. 1, 2025.

The single-member LLC is a “disregarded entity” for the tax year 2024, which avoids an entity tax return filing for the 2024 initial short year. You can add your spouse as an LLC member on Jan. 1, 2025, creating a partnership tax return for 2025. 

Alternatively, if you want health insurance and retirement plan deductions for 2025, your single-member or spousal-member LLC should submit a 2025 S-Corp election within 75 days of Jan. 1, 2025.

The partnership or S-Corp is deemed a “new taxpayer” in 2025, so it can make an internal resolution within 75 days of Jan. 1, 2025, to elect Section 475 MTM on securities for 2025. Otherwise, an existing partnership or S-Corp must file an external 475 election statement with the IRS by March 15, 2025.

TAX RELIEF: PRESIDENTIALLY DECLARED DISASTER AREAS

In 2024, several disasters, including hurricanes, flooding, tornadoes, wildfires, and railcar accidents, occurred. Check the IRS.gov website for Tax Relief in disaster situations. Click the button to get information about your state.

GIFTS AND ESTATE TAXES

The annual gift tax exclusion is $18,000 for 2024 and $19,000 for 2025.

The unified estate and gift tax exemption for those who die in 2024 is $13,610,000; for those who die in 2025, it’s $13,990,000; and for married couples in 2024, it’s $27,220,000.

The estate tax exemption was significantly increased under the TCJA but will expire at the end of 2025. It’s nearly double the pre-TCJA exemption levels. The increased exemption is scheduled to expire on Dec. 31, 2025. If Congress does not extend the current exemption, the estate tax exemption will revert to pre-TCJA levels in 2026, adjusted for inflation. Estimates suggest the exemption may drop to approximately $7.5 million per individual and $14.5 million for married couples in 2026. Check your state for estate tax rules, too.

Tax laws and regulations can change, so it is prudent to consult a tax professional for the most up-to-date information and personalized advice.

Star Johnson, CPA, contributed to this blog post. 

Tax Planning For S-Corps

September 22, 2023 | By: Robert A. Green, CPA

Read our related blog post and watch the webinar, Tax Planning For Traders.

Traders eligible for trader tax status (TTS) use an S-Corp to unlock health, retirement, and SALT deductions. It’s important to act before year-end using payroll. 

S-CORP OFFICER COMPENSATION

TTS traders use an S-Corp to arrange health insurance and retirement plan deductions. These deductions require earned income or self-employment income. Unlike trading gains, which are unearned income, a TTS S-Corp salary is earned income.

S-Corps pay officer compensation in conjunction with employee benefit deductions through payroll tax compliance done before year-end 2023. Otherwise, traders miss the boat. TTS is necessary since an S-Corp investment company cannot have tax-deductible wages, health insurance, or retirement plan contributions. A trading S-Corp is not required to have “reasonable compensation,” so a TTS trader may determine officer compensation based on how much to reimburse for health insurance and how much they want to contribute to a retirement plan. Remember, sole proprietor and partnership TTS traders cannot pay salaries to 2% or more owners; hence, the S-Corp is needed.

S-Corp wages impact the SALT cap workaround, hinges on net income after wages. If you fall into the QBI phase-out range, wages are required to increase the QBI deduction. This decision-making has many moving levers, so consult your CPA for year-end tax planning in early December.

S-CORP HEALTH INSURANCE

S-Corps may only deduct health insurance for the months it was operational and qualified for TTS. Employer-provided health insurance, including Cobra, is not deductible.

The S-Corp reimburses the employee/owner through the accountable reimbursement plan before the end of the year. Add the health insurance reimbursement to taxable wages, but do not withhold social security or Medicare taxes from that portion of W-2 compensation. The officer/owner takes an AGI deduction for health insurance on their tax return.

A taxpayer can deduct a contribution to a health savings account (HSA) without TTS or earned income.

S-CORP RETIREMENT PLAN CONTRIBUTION

TTS S-Corps can unlock a retirement plan deduction by paying sufficient officer compensation in December 2023 when results for the year are evident. Net income after deducting wages and retirement contributions should be positive.

If you want to, you must establish a Solo 401(k) retirement plan for a TTS S-Corp with a financial intermediary before the year’s end. Plan to pay the 100%-deductible “elective deferral” amount up to a 2023 maximum of $22,500 (or $30,000 if age 50 or older with the $7,500 catch-up provision) with the December 2023 payroll. That elective deferral is due by the end of January 2024. You can fund the 25% profit-sharing plan (PSP) portion of the S-Corp Solo 401(k) up to a maximum of $43,500 by the 2023 S-Corp tax return due date, including an extension, which means September 15, 2024. The maximum PSP contribution requires wages of $174,000 ($43,500 divided by a 25% defined contribution rate). The maximum contribution for those under age 50 is $66,000 for 2023. For those 50 or older, it’s $73,500 for 2023. Tax planning calculations will show the projected outcome of the various options of income tax savings vs. payroll tax costs.

Consider a Solo 401(k) Roth for the elective-deferral portion only, where the contribution is not deductible, but the contribution and growth within the Roth are permanently tax-free. Traditional plans have a tax deduction upfront, and all distributions are subject to ordinary income taxes in retirement.

Traditional retirement plans have required minimum distributions (RMD) by age 73 in 2023, whereas Roth plans don’t have RMD. (See SECURE Act 2.0 RMD rules at https://www.irs.gov/retirement-plans/retirement-plan-and-ira-required-minimum-distributions-faqs.)

SALT CAP

TCJA capped state and local income, sales, and property taxes (SALT) at $10,000 per year ($5,000 for married filing separately) and did not index it for inflation. About 29 states enacted SALT cap workaround laws. Search “(Your state) SALT cap workaround” to learn the details for your state. Most states follow a blueprint approved by the IRS.

Generally, elect to make a “pass-through entity” (PTE) payment on a partnership or S-Corp tax return filed by your business. It doesn’t work with a sole proprietorship filing a Schedule C. PTE is a business expense deduction shown on the state K-1 like a withholding credit. Most states credit the individual’s state income tax liability with the PTE amount. Essentially, you convert a non-deductible SALT itemized deduction (over the cap) into a business expense deduction from gross income. Act well before year-end; otherwise, you might delay the benefit to next year.

HAVE YOUR NEW ENTITY READY ON JAN. 1, 2024

If you missed employee benefits (health insurance and retirement contributions) in 2023, consider an LLC with an S-Corp election for the tax year 2024. Or you may want a spousal-member LLC taxed as a partnership for 2024 to maximize the SALT cap workaround and segregate trading from investing.

If you want the new entity to be ready to trade on the first trading day of January 2024, consider the following plan. Form a single-member LLC in December 2023, obtain the employee identification number (EIN) online, and open the LLC brokerage account before year-end to be ready to trade as of Jan. 1, 2024. The single-member LLC is a “disregarded entity” for the tax year 2023, which avoids an entity tax return filing for the initial short year 2023. You can add your spouse as an LLC member on Jan. 1, 2024, creating a partnership tax return for 2024. 

If you want health insurance and retirement plan deductions for 2024, then your single-member or spousal-member LLC should submit a 2024 S-Corp election within 75 days of Jan. 1, 2024.

The partnership or S-Corp is a “new taxpayer” to make an internal resolution to elect Section 475 MTM on securities only for 2024 within 75 days of Jan. 1, 2024. Otherwise, existing partnerships or S-Corps must file an external 475 election statement with the IRS by March 15, 2024.

 

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