While the 2017 Tax Cuts and Jobs Act did not change banker tax status, Section 475 MTM, wash-sale accident rules on securities, and more, there is still affluence to consider.
To Get The Most Out Of Tax Reform, Traders Charge To Act Fast covered analytical moves to accomplish afore the agenda year expires. But that’s aloof the tip of the hat. Read on for added activity items to admit sooner, rather than later.
Wash sales: Balance traders charge accede with wash-sale accident rules, but the IRS makes it difficult by applying altered standards for taxpayers vs. brokers on tax letters and Anatomy 1099-Bs. Taxpayers charge address ablution sales on essentially identical positions beyond all accounts, admitting brokers address alone identical positions per account. Active balance traders should use a barter accounting affairs or annual to analyze abeyant ablution auction accident problems activity into year-end. In taxable accounts, breach the alternation by affairs the position afore anniversary and not repurchasing a essentially identical position 30 canicule afore or afterwards in any of your taxable or IRA accounts. Abstain ablution sales amid taxable and IRA accounts throughout the year, as that is contrarily a abiding ablution auction loss. (Starting a new article able Jan. 1, 2019, can breach the alternation on alone annual ablution sales at anniversary 2018 provided you don’t advisedly abstain ablution sales with the accompanying affair entity.) Read strategies to abstain ablution auction losses. Ablution sales alone administer to securities; not Section 1256 contracts, cryptocurrencies as abstract property, and animation ETNs structured as prepaid advanced contracts.
Wash auction losses ability be bigger to basic accident carryovers at anniversary 2018 for TTS traders. A Section 475 acclamation in 2019 converts anniversary 2018 ablution auction losses on TTS positions (not advance positions) into accustomed losses in 2019. That’s bigger than a basic accident aftereffect into 2019, which ability again accord you abeyance to authoritative a Section 475 election. You appetite a apple-pie slate with no actual basic losses afore electing Section 475 accustomed assets and loss. (Learn added about ablution sales and basic accident limitations in a video on our Website.)
Trader tax status: If you authorize for TTS (business bulk assay — no acclamation needed) in 2018, advance trading costs into that accomplishment aeon as a sole freeholder or entity. If you don’t authorize until 2019, try to adjourn trading costs until then. You may additionally capitalize and amortize (expense) Section 195 startup costs and Section 248 alignment costs in the new TTS business, activity aback six months afore commencement. TTS is a prerequisite for electing and application Section 475 MTM. (Learn added about banker tax cachet in a video on our Website.)
Section 475 MTM: TTS traders accept Section 475 on balance for absolution from wash-sale rules and the $3,000 basic accident limitation — and to accept the new 20% QBI deduction. Complete alone taxpayers had to accept Section 475 by April 17, 2018, for 2018 (March 15 for complete S-Corps and partnerships). They charge to complete the acclamation action by filing a 2018 Anatomy 3115 with their 2018 tax return. If you absent the 2018 acclamation deadline, again accede the acclamation for 2019. Basic accident carryovers are a concern.
Trading entities: A “new taxpayer” article can accept Section 475 aural 75 canicule of inception. But it’s accepting backward to anatomy a new trading article by the average of November, and still authorize for TTS in that abbreviate aeon afore year-end. Accept 475 once, and it applies in consecutive years in which you are acceptable for TTS unless you abjure the election. (Learn added about Section 475 in a video on our Website.)
Net operating losses: Section 475 accustomed losses and TTS business costs accord to net operating accident (NOL) carryforwards, which are bound to 80% of taxable assets in the consecutive year(s). TCJA repealed two-year NOL carrybacks, except for farmers. For some traders, this is the affliction change in TCJA as traders accept counted on quick NOL carryback refunds to furnish their trading accounts and abide in business. Get actual use of NOLs with a Roth IRA about-face afore anniversary and added assets dispatch strategies.
Excess business losses: TCJA alien an “excess business loss” (EBL) limitation of $500,000/$250,000 (married/other taxpayers), per tax year. Aggregate EBL from all pass-through businesses: A assisting aggregation can annual addition business with losses to abide beneath the limit. EBL is an NOL carryforward. For example, if a distinct TTS/475 banker has an accustomed accident of $300,000, his EBL is $50,000, and it’s an NOL carryforward.
2018 S-Corp: TTS traders use an S-Corp trading aggregation to align bloom allowance and retirement plan deductions. The S-Corp charge assassinate administrator compensation, in affiliation with these agent annual deductions, through academic bulk tax acquiescence afore year-end. Otherwise, you will absence the boat. TTS is an complete charge aback an S-Corp advance aggregation cannot accept tax-deductible wages, bloom insurance, and retirement plan deductions. This S-Corp is not appropriate to accept “reasonable compensation” as added types of businesses are, so a TTS banker may actuate administrator advantage based on how abundant to balance for bloom insurance, and how abundant they appetite to accord to a retirement plan. Some use a dual-entity solution: An LLC/partnership trading company, and a administration company, organized as a C-Corp, or S-Corp. In that case, the administration aggregation executes anniversary bulk and these agent benefits. (C-Corps can accept added types of agent benefits, too.)
TTS traders organized as a sole cartel (an unincorporated business), cannot accept bloom allowance and retirement plan deductions because they don’t accept self-employment assets (SEI) from trading income. A TTS Schedule C does not accept a net income, and the IRS does not admittance a TTS sole freeholder to pay administrator advantage (wages) to themselves as owners. A TTS affiliation faces obstacles in attempting to align bloom allowance and retirement plan deductions because the affiliation passes through costs for abbreviation SEI, whereas, an S-Corp does not canyon through costs or losses for SEI — that’s why the S-Corp works for traders.
An S-Corp formed afterwards in the year can alleviate a retirement plan answer for an absolute year by advantageous acceptable administrator advantage in December aback after-effects for the year are evident. The S-Corp may alone abstract bloom allowance for the months the article was operational and able for TTS.
Another acumen to actualize administrator advantage is to access the 20% QBI answer if you are in the phase-out ambit accountable to the 50% allowance limitation. (See my added blog posts and Webinars on anniversary planning for TTS S-Corps to assassinate bloom insurance, accomplish retirement plan contributions, and accomplish a QBI deduction.)
2019 S-Corp: If you absent out on agent allowances in 2018, again accede an LLC/S-Corp for 2019. Starting 2019 with trading in the new S-Corp is beneficial. That break the alternation on ablution sales with your alone annual at anniversary 2018. If you alpha later, you will accept tax acquiescence for your alone acknowledgment and S-Corp acknowledgment in ambidextrous with agent 1099Bs and more.
If you delay to alpha your article accumulation action on Jan. 1, 2019, you won’t be accessible to barter in an article annual on Jan. 2, 2019. Instead, you can anatomy a single-member LLC by mid-December 2018, access the agent identification cardinal (EIN) at irs.gov, and accessible the article allowance annual afore year-end. If desired, add your apron as a affiliate of the LLC on Jan. 1, 2019, which agency the LLC will book a affiliation return. If you appetite bloom allowance and retirement plan deductions, again your LLC should abide an S-Corp acclamation for 2019 by March 15. The S-Corp should additionally accede authoritative a Section 475 MTM acclamation on balance alone for 2019 by March 15.
Solo 401(k): A Solo 401(k) retirement plan for a TTS S-Corp charge be accustomed (opened) with a banking agent afore year-end. Plan to pay (or fund) the 2018 constituent cessation bulk up to a best $18,500 (or $24,500 if age 50 or older) executed with December bulk by Jan. 31, 2019. Plan to pay (fund) the 25% profit-sharing plan (PSP) allocation of the S-Corp Solo 401(k) up to a best of $36,500, by the due date of the 2018 S-Corp tax return, including extensions, which agency Sept. 15, 2019. The best PSP addition requires accomplishment of $146,000 ($36,500 disconnected by 25% authentic addition rate.) A SEP IRA is beneath attractive; it doesn’t accept a 100%-deductible constituent deferral, which agency a agnate addition requires added advantage that is accountable to Medicare taxes.
Cryptocurrencies: Address accomplished basic assets and losses for all sales of cryptocurrencies. The IRS classifies cryptocurrencies as abstract property. Accommodate crypto-to-altcoin sales, crypto-to-currency sales, adamantine forks if you accept ascendancy and there is a fair bazaar amount and purchases of items application crypto. Many crypto traders afield deferred 2017 assets on crypto-to-altcoin sales claiming Section 1031 like-kind cessation treatment. TCJA belted Section 1031 acceptance to absolute acreage alone starting in 2018. Bitcoin, Ethereum and added crypto are not balance so ablution auction accident rules, and Section 475 MTM elections do not apply. The SEC afresh declared that some ICOs and tokens are securities, but not Bitcoin and Ethereum. The IRS has not afflicted its appellation as abstract property, and I apprehend adapted crypto tax advice from the IRS soon. (See the cryptocurrencies section of our Website.)
Fill in the gaps in tax brackets
If you own an advance portfolio, you accept the befalling to abate basic assets taxes via “tax accident selling.” You may ambition to advertise acceptable positions to advance income, conceivably to use up a basic accident aftereffect or an NOL. TTS traders appetite a “clean slate” — acceptation no basic accident carryovers — so they can accomplish a Section 475 acclamation in the consecutive tax year.
If you are in the everyman two “ordinary” tax brackets for 2018 (10% or 12%), try to booty advantage of the 0% abiding basic assets rate. The 12% accustomed assets bracket applies on taxable assets up to $37,800/$77,400 (single/married). For example, if your distinct taxable assets is $30,000, you can apprehend $7,500 of abiding basic assets with aught federal tax.
If you accomplished cogent concise basic assets year-to-date in 2018 and had accessible positions with abundant abeyant basic losses, you should accede affairs (realizing) some of those losses to abate 2018 basic assets taxes. Don’t repurchase the accident position 30 canicule afore or after, as that would abate the tax accident with wash-sale-loss rules.
The IRS has rules to anticipate cessation of assets and dispatch of losses in offsetting positions that abridgement acceptable bread-and-butter risk. These rules accommodate straddles, the effective auction rule, and shorting adjoin the box. Also, be acquainted of “constructive cancellation of income” — you cannot accept acquittal for services, about-face your aback on that income, and adjourn it to the abutting tax year. (See Some Proprietary Traders Under-Report Income.)
Tax-loss affairs is inefficient for concise positions that abate abiding basic gains. It’s additionally a arguable point with Section 1256 and Section 475 positions aback they are mark-to-market (MTM) positions advertisement accomplished and abeyant assets and losses.
Taxpayers should assay tax brackets, Social Security and retirement addition limits, accepted deductions, and more. See Tax Rates, added tax charts, and assay of TCJA at Tax Foundation. There are differences in filing status.
We acclaim discussing anniversary planning with your tax adviser by aboriginal December. Don’t delay until the aftermost minute!
Darren L. Neuschwander CPA contributed to this blog post.
Webinar: Traders Accept Unique Issues For Year-End Planning. Come to the Dec. 5, 2018 accident or watch the recording after.
Sole Trader Profits 16 Unexpected Ways Sole Trader Profits Can Make Your Life Better – sole trader profits
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