Discussion:SE Health Insurance - Trader

FYI, a self-employed individual has the ability to take SE Health above the line in a loss year...see Sec. 401(c)(1)(B).

You can get around this by setting up an S corporation to do the trading. The 162(l) limitation would then be the amount of the FICA wages drawn from the corporation.

See this link to http://www.greencompany.com that discusses traders and deducting SE health insurance. An S is an option and I've read that some set up a separate Sch C to generate the SE income to deduct the insurance. A fee is deducted on the trading expense Sch C and shown as income on the management fee Schedule C. Either way you will general SE income and SE tax. Good reading.

http://www.greencompany.com/EducationCenter/GTTRecFringeBenefitPlans.shtml

I believe its the same issue as Health Care Premium contributions.

The goal. To as a trader establish earned income so as to be able contribute to a solo 401k.

He states in a single member LLC that you can have 2 Schedule C's. The first pays an administration fee to the second. The first Sched C takes this as an expense. The second Sched C shows it as Line 2 Gross Receipts and .. on LIne 12 of the 1040 its reported as Business Income. That would generate the earned income from which to pay SE tax and then fund the 401k...

Has anybody seen this "financial engineering" in practice. He is selling it as a solution for single member llc's that are traders to create earned income for SE Tax and then retirement plan contribution...

I was just on a scheduled call-in conference call yesterday that he has for traders and I was the first one to get a question in. I asked him point blank:

Is it a better strategy for me to do the 2 Schedule C solution (that he says is an option) or just take on my son as a 1% partner making my SMLLC a full blown MMLLC which would allow me to take a "Guaranteed Payment", pay the SE Tax and then fund the retirement account.

He summarized all the preliminary info from his books etc.; (the same info that got me to the point of my question;) and then said I need some consulting to further explore solutions for my particular situation.....

What???

Pay another 150/hr to be told yes or no? This Homey don't think so. So he didn't answer the question. He did imply that he has done that in the past on traders returns and has never had an issue with the IRS.

What I do know is that he is selling it as a solution for single persons who are traders (SMLLC) who want to have a Single 401k and who don't have the earned income to facilitate it...

So what is this guy selling steam or smoke?

So the bottom line question is: Is there any way through whatever creative accounting known to man... take trading profits in to an LLC and have that LLC pay me so as to generate earned income? If the answer is no there are going to be a lot of very upset people.

I think I'm missing something.

Did you say that even in an MMLLC the guaranteed payment would not generate earned income for my personal return?

I found this and I'm, not an accountant or a CPA but I believe it conflicts with what you just said. I'm not busting anybody, just trying to have this understood by the time tax time rolls around...

I'm glad its only August and I wasn't trying to figure this out in March!

http://www.1065accountant.com/guaranteed-payments.htm

Partnership Guaranteed Payments Guaranteed payments are payments to individual partners for services rendered or for use of capital, and are not based on the partner’s share of partnership income. Guaranteed payments to partners are deducted from partnership income before determining partnership profit or loss. Guaranteed payments are generally subject to self-employment tax on the recipient’s individual return.

If the partnership agreement states a partner is to receive a minimum payment, the guaranteed payment is the amount by which the minimum payment is more than the partner’s distributive share of income, before taking into account the minimum payment.

Guaranteed payments can cause a partnership loss. The partner(s) that receives the guaranteed payment reports the full amount as ordinary income. The partner also reports his/her distributive share of the partnership loss.

Mtmckee notes above the possibility of setting up an S Corp and drawing a salary to create that vehicle. Maybe that is the way to go.

Rob is just angry that none of us will agree with his favorite author and CPA. If he didn't already doubt the knowledge of his CPA author friend, he wouldn't have even posted once, let alone 5 or 6 times.

Discussion:Partner's guaranteed payments & unreimbursed expenses

Discussion:LLC Tax Clarification

Discussion:LLC member's salary

Discussion:Solo 401K Deadlines

Discussion:Single Member LLC payment for services rendered

and of course this thread, Discussion:SE Health Insurance - Trader

Face it, Rob, your CPA is wrong. He didn't want to admit it over the broadcast but he already knows it. He has a "workaround" which we gave you for free, but he wants $150 for telling you about it. Isn't that how all of those "get rich quick" schemes work: sell the ideas in a book, tape, cd, dvd, mp3, or webcast, because you sure can't make the actual ideas work enough to make a living off of. If any of his ideas were so great, he would be too busy making money using the ideas to even do a webcast.

He is not my CPA. I'm trying to find who is for next year. I only used him to set up the LLC. As I've never heard of these solutions to my questions I thought I'd bounce it off some other authorities. (here)

I just assumed (maybe erroneously) that if those solutions are in a website, books, etc. there may be some validity to them. I'm just a single taxpayer trying to do my due diligence for whats best for me...

I have no problem paying for professional services rendered. I already did that and the solution was to set up a LLC. I just want to make sure the setting up of the LLC was predicated on a solution that is valid for my intent of funding a retirement account. I'm just double checking other sources. Better to get things straight in August than scrambling in March.

In the future I'll keep posts to one specific thread as it appears everybody reads most of them....

Thanks for all the responses...

I am not sure if this is the issue being discussed here...but it has always been my understanding that if an individual has two separate Sch C businesses, one has a net loss and the other has a net income that as long the health insurance plan and the retirement plan are set up and directed toward the business that earns the net income that you can take a deduction for both despite an overall net loss.

I have read Mr. Green's book on trader tax and have tuned into his webinars and have found them to be helpful...he is a tad bit heavy on the marketing side for my liking...but IMO...his site is the "go to" site for information on trader tax issues.

I wrote an article regarding Forex taxation and referenced his book and name in the footnotes and he called me to make sure that I, in fact, gave him credit in that article.

Thank you. That is exactly the question... Does it pass the smell test?

Maybe if it were the wife's portfolio and she paid him for his efforts???????

Thanks.

The idea was to use 2 Sched C's on 1 business. Its not a case of 2 businesses where Business 2 uses earned income for business 1 type of thing.

Anyway after a whole night deep in the code with several pots of coffee I've found what I was looking for. The best course seems to be...

Take on a new member to the SMLLC making the current SMLLC a full blown MultiMember LLC. 2+

In the tax code it says that for tax purposes (1065) an LLC is viewed (by default) as a partnership where a limited partner is able to accept a guaranteed payment for services rendered.

The services rendered will be the overall management and compliance as a New Jersey based LLC. This is outside the percentage share of distribution of profits of the LLC.

These guaranteed payments are subject to the SE Tax therefore its earned income and thus problem solved I can go fund a retirement account...

The problem was I wasn't looking at the big goal and just worrying about how to voodoo engineer 2 Sched C's into 1 return...

Thank you again everybody for your responses...

(no hatorade here!)