How to Trade in an LLC or a Corp transcript

[Music] in today's episode we're going to talk about how to trade in a business account in order to take advantage of the tax deductions that are available to small business owners I would wager that 95% of Traders out there are not doing the things that I'm going to share with you in today's episode and as a result are paying more in tax than is necessary which essentially means you need to make more money each year to walk away with the same amount of net profit as a Trader who is more tax efficient than you are now we all want to talk about how to get better as traders in the form of finding the best stocks to trade the best entries the best exits and it doesn't just have to be stocks you could be trading crypto you can be trading Futures whatever you're trading but there's also something to be said for learning how to be more tax efficient because I could tell you for instance right now because of one choice that I've made I pay significantly less tax than most Traders out there and well it's to the tune of millions of dollars that I've saved I'll share that with you during today's episode now in most of us set up our first account as a Trader we do it in our personal name and I was no different this is what I did as well and at the end of that first year we get a1099 and that tells us how much we made now the problem with trading is that all trading income is considered shortterm capital gains in fact any position that you hold for less than 12 months less than a year is a short-term capital gain and short-term capital gains are taxed at the same rate as regular income so if you made $100,000 working at a regular job a W2 or you made $100,000 as a Trader you would more or less pay the same amount of tax you would pay a little bit more as a W2 employee because when you get your W2 they take out money for Social Security and they take out money for Medicare when you're at$ 1099 you don't pay into either of those so so you do pay a little less taxes at $199 but nonetheless you're still paying a substantial amount so let's just say for the sake of keeping numbers round that you made 100,000 bucks now for most beginner traders that would be a phenomenal first year of trading when I got started my goal was $200 a day and in my first year of trading I made about $30,000 so then this was more than a decade ago it was a long time ago but nonetheless $330,000 for me was was okay at that time but again cost of living has gone up and many you guys are going to try to be more aggressive than I was when I was getting started so let's just say you make $100,000 approximately 400 a day well if you made that as a1099 and you live in a state like New York or California you're going to pay upwards of you know about $30,000 in tax and this for a lot of beginner Traders comes as a surprise all of a sudden they're like doing their tax or Turbo Tax or whatever it is and they're like whoa I owe 30 grand because you know as the year has been going on we haven't been taking money out and contributing in to pay taxes the way you would as a W2 the money has been growing and growing and growing and growing now the worst thing that can happen to a Trader is they make a ton of money between January 1st and December 31st and then between the months of January February and March they lose it because now you still have you still have the this tax right here right you still got tax that you've got to pay into and well you don't have the money to pay it so that's a terrible situation to be in you want to avoid that as much as possible but also let's be real okay $30,000 is how much you would pay without using any deductions whatsoever so now let's contrast a 1099 versus an LLC or a corporation income produced in an LLC can be subject to a 15% self-employment tax if that's your primary source of income and that's going to be a problem so what that's going to ultimately do is the profit from the LLC is going to pass through to you and then in addition to paying your regular short-term capital gains tax rate you're also going to pay a 15% self-employment tax trading income is not considered earned income so some people will argue that it it's not subject to self-employment tax which is very easy to argue when the trading profits in your personal name but when the trading profits in N LLC unless it's purely for the purposes of asset protection it's it's going to be a little bit harder to justify especially if you're taking all these deductions so then ultimately what you're doing is you're taking deductions that are then just offsetting the 15% self-employment tax it it what's what's even the point so the other alternative is setting up a corporation incorporating so if you incorporate and you choose s status election then all of the income gets passed through to your personal return and you are not subject to self-employment tax in an escorp escorp shareholder ERS who are also working for the company do have to take a salary a wage which we'll talk about in a minute but but that for me is is totally tolerable and totally doable and is preferable to the llc's self-employment tax so LLC or Corporation these are your two options ultimately I will always choose to trade in a corporate account over an LLC when it comes to tax efficiency so this is the when it comes to tax efficiency let me just show you what a lot of us are going to do as active Traders we're going to do the math we're going to say all right well I made $100,000 but look let's get real there's no way I made that without incurring some costs along the way I mean just look around we've got 1 two 3 four five monitors I've got two computers right here and while this might be a little bit of a bigger setup than the average Trader it's still substantial and hey let's not forget there's a desk right here there's a little section of this house that is my home office all right now if you itemized all of these deductions if as if you received a199 the problem is a lot of CPAs will say Ah that's going to be sending up a little bit of a flag for audit risk but as a small business owner especially if your business produces limited income this is not going to be as much of an issue so small business owners I mean look this country was founded on small businesses and so as a result politicians have done a lot to advocate for small business owners such as ourselves now although trading as a business may not be what they were really thinking of they were probably thinking of you know your mom and pop stores your plumbers your electricians things like that nonetheless we qualify because we are running a business as a Trader okay so let's say you made the $100,000 but let's figure you've got at least $5,000 in equipment you got $5,000 in equipment and now you've got your home office so home office and what are some of the expenses related to your home office you've got either you know rent which some people will actually you know factor in rent and so what you do is you take what's the percentage square foot of your home office relative to your house so if it's 10% then what a lot of people will do is 10% of your rent 10% of your mortgage 10% of your property in your property taxes 10% of your insurance 10% of all of these expenses right here boom boom boom boom boom you're going to deduct through your escorp so what your escorp might do is write you a check so write you a check to reimburse you and then you need to make sure you have copies of every one of these different invoices or statements so you can back up the deduction that you're taking because you're saying this is a home office this is a business expense which is a valid business expense but you've got to make sure you've got it all dialed in you've got to be very detailed about it if you're willing to be detailed if you don't mind maintaining a QuickBooks file which is super simple I mean it's really not hard stuff then keep that QuickBooks file keep a folder on your computer for the year and your statements which is your receipt and then for every line item just make sure you've got your backup this is the proof that this was the expense so now all of a sudden you know you're deducting 10% of your your rent your property taxes your insurance all this stuff your internet um the heat the the cooling energy bills etc etc now this can be a significant deduction all right so let's say let's say it's $1,000 a month all right that's still $112,000 so now you've got your $5,000 you've got your $122,000 this was money you had already spent you were spending this essentially as it as it were but now because you've got a home office because this is your business you now have the ability to deduct it and that reduces your income so now all of a sudden instead of having $100,000 of taxable income you you've reduced it by $177,000 so now you're at $83,000 of of taxable income all right so hey that's a step in the right direction but there's certainly more that you can do than just this I mean this is keeping it fairly simple some Traders are going to take it a step further and let's say for instance what are some of the other expenses you incur let's say you're spending $100 a month $200 a month on new streaming news services on trading platforms you're spending money on continuing education right you're spending money on chat room memberships things like that all right you've got to start deducting these you should be deducting them you should be at least accounting for all of this because these are expenses that you're incurring in order to generate this profit this profit does not ever come without expenses but what a lot of beginner Traders do is they just don't keep track of it and then at the end of the year they're like oh my gosh I ow $30,000 it's like well hold up add up all these expenses you're spending you know $1,000 a month on the home office you're spending 5,000 on equipment to get started you're spending over the course of the year you know let's just say $8,000 here so you got $25,000 in expenses all right so now your taxable income is $75,000 now let's just say for a second that you really don't need $75,000 to make a good living well here now this presents a very interesting situation because you made $75,000 but you don't want to necessarily pay tax on the full 75,000 let's say you really only needed $1,000 a week to cover your cost of living that's $50,000 a year which means you've got an extra $225,000 here of taxable income what are you going to do about that well this is what a lot of people will do in an es Corp so in an es Corp one of the rules for an es Corp is that you have to take a salary you have to take what's called a reasonable salary now reason able is obviously a term that can be argued one way or the other you could reasonably maybe say you should have a very high salary you could reasonably say your salary could be a little bit lower so let's just say for the sake of argument right here that you're going to take a salary of $50,000 a year okay so you're taking a $50,000 annual salary now let's hold up so minus $50,000 here is your salary your company deducts that right and then you of course receive that on your personal return as your W2 salary so now you are essentially a W2 but the company at the end of the year still has $25,000 sitting here in profit now $25,000 can be distributed to you as a shareholder and you get a K1 that's a just distribution of corporate profits that is not going to be subject to the same taxes as W2 income all right so that's one thing you could do you could take a distribution that's going to save you a little bit but you're going to still pay income to tax on it so what is a better way to do this is to set up a solo 401K you set up a solo 401k and you do an employer match you can contribute up to $23,000 a year into a 401k and if you do a profit sharing match you can have total contributions of $69,000 a year $69,000 a year you can be putting away taxfree you're putting it away and it's coming off your total taxable gain so now let's just say for the sake of argument instead of making a $100,000 a year let's just say you fully maximized on your 401k boom $69,000 you now have $31,000 of taxable income now you write off some of the home office dedu deductions you have the deductions for your equipment and things like that now your tax bill is going even lower naturally you need money to pay your bills and so the money for paying your bills is what's ultimately going to be the money that you're going to have to pay tax on because there's not really a good way around that when it comes to trading profits there are fancy things that people do with real estate you know where they they'll buy something and then they'll refinance it they'll take the money out and you don't get a tax event on that but but that's that's complicated you need a lot of money to get start in that business and that's not what you guys are here for you guys are mostly focusing on trading so when it it comes to trading you pay yourself the salary and since you're since you're the only employee this is super easy to set up so you pay yourself a salary and then you do a 401k so you set up a 401k and then you can do a 50% from you so 12,000 from you 12,000 from the company you give yourself a bigger salary to accommodate the 401K contributions and then that Nets you down to zero and what you've effectively done is you're now paying tax on $50,000 of salary instead of $100,000 a salary and you're putting aside $25,000 which is tax-free right that's nice that's really nice and these are things that anyone can do but most people aren't doing them now I I'll I'll tell you in case you didn't know I'm not a CPA I'm a Trader but I've been doing this for a long time so I've gotten a good sense of what different people do both my students at Warrior trading but also myself so one of the things that I did when I first got started when I was first trading I set up an account in my personal name and then I set up an account in a business account and it was an escorp I did that for many years as an escorp and it made a lot of sense I did all these things I took the deductions you know I had an accountant that reviewed it but I had my equipment I had my expenses and that was able to offset my total gains so I wasn't making a lot of money in those early years but those were the times where things were were tight right things were really tight for me at that time and so every little bit made a difference and for me I felt like the difference between success and failure it was a difference between $100 and $200 a day consistently making 50,000 a year or consistently kind of struggling and so if I was able to reduce my taxes a little bit by making sure I was deducting equipment that I had already paid for that I had bought these computers the monitors the internet service right you're leaving money on the table if you're not taking advantage of any of the stuff so what I would say is that a good accountant is worth their weight in gold so let's say a good accountant is 100 180 pounds 180 pounds you do the math they're worth a lot of money in Gold this is something that you should really consider spend an hour two hours getting a consultation from a good CPA and having them lay out for you the options trading in an LLC trading in escorp again I'm always going to choose an es Corp I think it's the better way to go but you could choose whatever's best for you choose the LLC choose the es Corp either way it is is okay I suppose I again I prefer the es Corp with an es Corp you do have to take a salary uh with an LLC um the problem with an LLC is that it is just going to pass through straight to you and you can do s status election with an LLC but you might as well just do an sc Corp I it just to me makes more sense to do an es Corp and then you can do your 401k you've got your solo 401K you can do your contributions there and this to me just makes the most sense so when it comes to setting up an ESC Corp um one thing that I made a little bit of a mistake on when I first got started was I set mine up in Vermont because I lived in Vermont I was like well this makes sense what I didn't realize is that there are states that have more favorable laws for corporations Delaware Nevada right you I mean this is probably wasn't a surprise now that I say it but you know a lot of companies you'll see they're Incorporated in Nevada Incorporated in Delaware these are states that have really friendly laws for corporations specifically and they have good asset protection for corporations so that way you're protecting the assets that are inside the company which ultimately is your trading account from any possible liability that might come if you know you run over some I mean God God forbid but let's just say you run over someone's foot they're standing too close to you in the parking lot you crunch their foot all right and let's say they're professional soccer player so now they're going to sue you for a million bucks well if you're Trading account is in your personal name you got liability there if your trading account is in an LLC or it's in an escorp it's protected so you know it's just it's it's like Good Housekeeping it's a good idea to do it you'll probably never need it you'll probably never be in the situation where that would happen but you know set it up it's easy enough to do and it has sort of multiple benefits now the ultimate way to save taxes when it comes to trading is to start trading just in your retirement account so now you've got this solo for 401K for instance or what I like to do is I like to set up a Roth IRA so what you can do is you take a little bit of profit from Trading you take $6,000 let's just say and you contribute it into a Roth IRA you do that and now you can start trading in this account and the income that's produced in the Roth IRA is taxfree and the distributions when you take them are totally tax-free the only problem is you can't take a distribution until you're 59.5 years old so you have to wait a little while well depending on how old you are of course but once you start taking those distributions the distributions are totally taxfree so if you're starting to trade and you're in your 40s you're you're in your 50s this would be something where okay I have no income tax now and you know in the not too distant future I could be taking that profit out totally tax-free so with a Roth IRA the maximum contribution limit I think right now is moved up to 7,000 but in any case what I did was I contributed 6,00 000 which was the max contribution at that time and I did it three years in a row 6,000 year 1 6,000 year 2 6,000 year 3 I actually did a traditional IRA and then converted it a lot of people do this anyway so I contributed $18,000 and then from there I grew the account to over $6 million and I did that totally taxfree if I had made that same $6 million in a taxable account hello I would have paid nearly $3 million in income tax that's that's real so that's how much I saved by using a Roth IRA now as for me I was making so much more money than I needed to cover my cost of living and so it was like how do I defer having to pay tax because making $6 million or $5 million in one year which I did in 2020 I just didn't need that much money for my cost of living but it's not like I wanted to stop making money the market was hot so I thought I'm just going to focus on trading in my Roth IRA I can't touch the money right now but I can just grow It Grow It Grow It Grow It Grow it at that time I was trading in two accounts I had a business account and I had my Roth IRA the business account was the account that I used to make enough money to cover my cost of living and then once I exceeded and it sort of met that number then everything after that taxfree so I was constantly thinking about this because I wanted to be as tax efficient as possible especially when I got to the point of making millions of dollars in one year as a beginner Trader making 20,000 30,000 50,000 100,000 is the is the amount that you're saving by taking some of these steps as big as someone who's making millions no it's certainly not but I think it's a good idea to lay the foundation and for most Traders it's also like why not you know why not because you're just going to be more efficient you know why not take these deductions why not set up the accounts the right way from the beginning on the other hand if you have losses if the es Corp or the the LLC has a loss then you're able to deduct that the the business loss against income that you've got somewhere else so you know I I just think it makes sense and I've had so many Traders over the years who have come to me and said Ross should I trade in a corporation should I trade in a you know an LLC or or my personal name and this and that and what I often have said is first first things first get your trading dialed in in a simulator so there's no taxes on simulated trading profits obviously so first get good in a simulator and then once you've gotten good in a simulator and you're getting ready to flip the switch if you want to just set up a regular account in your personal name for your first year then do that right now you're still kind of on the uamp getting dialed in prove that your strategy carries over from SIM to real money and if it does and you start scaling up then it's time to take that next leap you know again some people are going to go ahead and do it immediately and start deducting all the expenses even when they're trading at a loss because they're thinking well I'll deduct that against maybe you know other income that I have and sometimes the first couple years of a business do lose money but that is offset against my other income so it makes sense and that's fine too you really you have to do what's best for you and so as always I would encourage you to consult with a CPA or a tax attorney and have them give you the advice of you know what makes the most sense for your specific situation for the state you live in of course the country you live in and everything else if you enjoyed this episode I hope you hit that thumbs up and I hope you subscribe to the channel and we'll see you for the next episode real soon [Music]