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Old 12-22-2011, 11:51 AM
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trading Income in S-Corp.

I own a S-corp. The Articles of Incorporation says it can be used for any legitimate Business in Illinois.

I opened a Stock trading Acct under S-corp name, using S-CORP funds. I have some "short term" capital gains this year.

Questions:
1.) Is this considered "income" to the S-corp or strictly "Capital gains" for the S-corp, for taxes?
2.) Can I deduct my Laptop cost, Internet Usage fees, Business cell phone etc which were used to trade for the S-corp ?. I trade twice or thrice a week.
3.) If this is considered as purely "Capital Gains", I hope I don't have to pay any taxes on monthly, quarterly withdrawals from the Trading Account. Correct?



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Old 12-23-2011, 09:49 AM
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“1.) Is this considered "income" to the S-corp or strictly "Capital gains" for the S-corp, for taxes?”----> Generally, an S corporation is exempt from federal income tax other than tax on certain capital gains and passive income, instead, an S-Corporation passes-through profit (or net losses) to shareholders. The business profits are taxed at individual tax rates on each shareholder's Form 1040. You need to use Form 1040, Schedule D to report your short term capital gains from the sale of financial instruments .So, With an S-corporation, all profit passes through to the business owner, which means that you will pay personal income tax rates on all earned income. Since capital gains are handled at the corporate level with an S-corp, the IRS taxes earned income and capital gains at the same rate( no special LTCG tax rule).
“2.) Can I deduct my Laptop cost, Internet Usage fees, Business cell phone etc which were used to trade for the S-corp ?. I trade twice or thrice a week.”---->Yes you can. as long as the expenses are related to your business; they will go on the S-corp's return on 1120S. Since your S-corp net flows to your personal return on 1040, this essentially deducts it from your personal return( by reducing your net income and taxable income and tax liability.) also. You need to do the 1120-S, once completed schedule K-1 goes showing your share of income and expenses.Schedule K-1 of 1120S goes on the back page of Schedule E which then goes on the 1040 as a profit or loss.
“3.) If this is considered as purely "Capital Gains", I hope I don't have to pay any taxes on monthly, quarterly withdrawals from the Trading Account. Correct?”---->It depends; your S Corporation must file Form 1120W for built in gain tax if your S corp has, which is an estimate of tax payments for the year. OR the S-Corp income flows to your personal return, use Form 1040-ES to make the estimated payments;you need to pay your quarterly estimated taxes as an individual who either expects to receive income not subject to tax withholding or does not expect a sufficient amount of taxes to be withheld from your income.

As said above, yoour S corporation is a flow through entity. The S corporation itself, while it files its own tax return each year, typically pays no income tax. The net income (revenue less deductible expenses) on your 1120S flow through onto your S corp AAA and stock basis and personal return (1040). This is accomplished by preparing a K-1 tax slip that indicates the amount of net income and other relevant information that is reported on your personal return. That's how a typical S-Corporation works. However, as a major tax planning item, the corporation can pay you a reasonable salary (subject to FICA) and a distribution (which isn't subject to FICA). This can represent a huge tax savings in the amount of FICA you must pay each year.


Last edited by Wnhough : 12-23-2011 at 10:44 AM.


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Old 12-23-2011, 12:01 PM
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Hello Wnhough,
First of all, my sincere thanks for shedding light on my questions. It has helped.
Knowing the answers to 2 more will greatly help me.
Please guide me.I am new to S-corp.
1.) My primary confusion is, there are 2 ways to withdraw money from S-corp. One by paying myself "salary" in which case I see that I have to pay( Federal Income Tax + Social Security + MediCare + ILLinois State Unemployment Insurance IDES + Federal Unemployment Insurance FUTA + State Income Taxes). Even though Federal & State Income taxes are paid ONLY once( Flow Through Taxes), I am looking at 6 Taxes before my Net Pay in my Personal Bank Account.
Second, way of withdrawal is I believe, treating the Trading Gains as "Capital Gains" in S-corp in which case, I report the gains in My Personal 1040 Schedule-D and I get taxed only on Federal & State Income Taxes. So totally 2 taxes, instead of 6 if I did the "salary" in S-corp. Am I correct?. It seems like drawing a salary for my case, leads to too much taxes.

2.) If I did not pay a Salary to myself, Can I still do the Business Deductions?



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Old 12-23-2011, 12:34 PM
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Even though Federal & State Income taxes are paid ONLY once( Flow Through Taxes), I am looking at 6 Taxes before my Net Pay in my Personal Bank Account. “---->Correct; a withholding tax is an amount of money deducted straight from money you’d normally be paid by your S corp ( as your ER). For the basic paycheck, the employer uses the withholding tax to pay taxes to a government. In the US, this can mean employers withhold taxes to pay the Internal Revenue Service, and in states where there is a tax on income, employers may also use a withholding tax to pay state taxes. Money is additionally withheld to make contributions to Social Security.In the US, both federal and state withholding tax tends to be determined by two factors: the amount of income you make and the number of exemptions you take.your tax refunds are due when you have been overwithholding, or has overestimated income or underestimated deductions, exemptions, and credits. Though you may like the fact that you are getting a tax refund, in fact you are granting the government an interest-free loan for most of the year; S-Corp income or loss flows to the stockholders so it will never get a refund.
“Second, way of withdrawal is I believe, treating the Trading Gains as "Capital Gains" in S-corp in which case, I report the gains in My Personal 1040 Schedule-D and I get taxed only on Federal & State Income Taxes. So totally 2 taxes, instead of 6 if I did the "salary" in S-corp. Am I correct?.”--->Correct; FICA , Soc sec tax(OASDI and HI tax)taxes only apply to your earned income,i.e, slaries,wages and self-employment income. Those are both earned income, and long-term capital gains is unearned income NOT subject to FICA tax.Up to 2012, aslong as your marginal tax rate is lower than 25%, your LTCG tax rate is 0%, No LTCG tax.

" If I did not pay a Salary to myself, Can I still do the Business Deductions?"--> Of course as far as they are related to your business.



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Old 12-23-2011, 12:38 PM
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Your S-Corporations MUST pay you a salary. Often,you, the business owner, will work for the S-corporation, and the S-corp must pay owner-employees a reasonable salary. Paying zero wages to an owner-employee is unreasonable. (Would you take a job that pays nothing?) Paying wages less than the minimum wage are also unreasonable



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Old 12-23-2011, 01:02 PM
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Replying to previous Feedback.

Wnhough:
Your S-Corporations MUST pay you a salary. Often,you, the business owner, will work for the S-corporation, and the S-corp must pay owner-employees a reasonable salary. Paying zero wages to an owner-employee is unreasonable. (Would you take a job that pays nothing?) Paying wages less than the minimum wage are also unreasonable

SPKB69:
I am with you that S-Corporations MUST pay owner-employees a reasonable salary. That brings me back to another hazy area "Is my day Trading considered by IRS as a Securities Trading Business"??. If "Yes", then I am ok to pay wages to employees-owners.
IRS guidelines for defining trader "Your activity must be substantial" , how much is "substantial"??. I cannot live off of what I earn from Trading. So does that make me an "Investor" as opposed to a "Trader?.
I guess I have to estimate hrs spent per week, month and pay minimum wage rate for those hours as Salary to myself and claim the rest as "Capital gains".
Neither a Full fledged trader nor an Individual( I still need to pay employees in my S-corp)



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Old 12-23-2011, 01:20 PM
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"Is my day Trading considered by IRS as a Securities Trading Business"??. If "Yes", then I am ok to pay wages to employees-owners. “---->Sorry, NOT sure; to be a day trader under Securities Exchange Comm. rules you need to have a margin account with at least 25000 in it. Number of actual trades is not important.
“IRS guidelines for defining trader "Your activity must be substantial" , how much is "substantial"??. I cannot live off of what I earn from Trading. So does that make me an "Investor" as opposed to a "Trader?.”-----> What does "substantial" mean? This is a very subjective test. Substantial can mean something different for every trader. The definition of substantial includes words such as material, significant, fairly large, considerably, belonging to substance, strong, firm, solid, corporeal, etc. A full-time trader must be trading daily or almost daily and have a sufficient amount of equity in a direct-access or online brokerage account to have an opportunity to earn enough profits to pay his or her expenses and support ones lifestyle. It's tough to justify substantial activity with an account of $25,000 or less. Most active traders have have at least $50,000 - $100,000 in a trading acount and have invested significant sums of money on trading books, charting software, seminars and computer equipment. if you haven't then you have not yet demonstrated that you have a legitimate trading business.



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