Online Trading Academy Lessons from the Pros 02/18/05: Deductible Expenses

Traders Accounting: Deductible Expenses

Deductible Expenses
By Jim Forrester, CPA

Traders Accounting provides tax consulting, entity formation, tax preparation and 401(k) services that help you efficiently establish and maintain your trading business. They teach you the IRS rules that allow you, as a trader, to deduct the widest range of business expenses and fringe benefits available to business owners. The goal is to help you lower your taxes, save you time, and maximize the benefits of your trading business. Visit their web site at: www.tradersaccounting.com

Oh, the Deductible Expenses You’ll Know as a Trader!

Repeat after me these three magic words: “ordinary, necessary and reasonable.”

These are the generously inclusive terms the Internal Revenue Service uses to determine whether the business expenses you claim on your income tax are appropriate deductions.

As a self-employed trader, in business nearly everything you purchase that has a legitimate business purpose can be deducted from your gross income on your federal income taxes, including training, medical expenses (with the appropriate business), utilities, research materials, equipment, services, supplies and all business-related travel.

There is a catch, of course. You must qualify for trader status. Otherwise, you will be treated as an investor, lose most of your potential tax write-offs to the 2% threshold for deductible investment expenses, and face the $3,000 ceiling on capital loss deduction. You could face this capital loss ceiling if you did not elect the mark to market accounting method by the April 15th deadline last year.

It can help significantly to trade as a business entity; C Corporation, Limited Partnership or an LLC are popular ways to avoid being considered a mere investor, thus losing most of those valuable deductions. At Traders Accounting we do not believe in cookie cutter approaches to tax efficient trading so you should contact a Traders Accounting tax professional to help you determine which business entity is right for you.

Trader Tax Deductions

As it’s not at all uncommon to accumulate $15,000 to $25,000 in deductible expenses annually. Here’s a look at some of the major deductible expenses:

Home Office Deduction: One of the most tantalizing features of working from home is the home office deduction, which is based on the percentage of your home that you use exclusively for your trading business.

If you own your home, your indirect expenses include real estate taxes, mortgage interest, home insurance, utility bills, repairs and maintenance, condominium association dues and the like. Depreciation is calculated on the purchase price of the house (but not the land) at the same percentage your home is used exclusively for trading. If you rent, your rent payment may be your major indirect expense.

Margin Interest: All margin interest is fully deductible to traders using mark-to-market.

Legal and Professional Fees: The fees you pay your accountant, lawyer, investment advisor and other business consultants are deductible in the year in which they are paid. If you have an entity that is on an accrual method (or hybrid accrual/mark-to-market), you can deduct the expense when it occurred. Business books and related materials, dues in professional organizations, subscriptions to investment newsletters and professional journals, and business licensing fees also are deductible.

Travel and Entertainment: If you travel for business, it’s fully deductible: airfare, lodging, rental car, taxis, meals, phone bills and tips. But be sure to document everything with receipts. If you entertain a client and pick up the tab, you may deduct 50% of the bill as long as business was discussed immediately before, during or after the event.

New Equipment: You may write off the purchase of equipment in one of two ways: by taking the full deduction in the year of purchase, or by “capitalizing” (amortizing) the cost over several years. A Traders Accounting tax professional can help you determine which method is best for you.

Business Expenses: The many and sundry costs of doing business, from advertising to thank-you gifts, stamps and postage to ink cartridges and paper clips are all deductible.

Services: The cost of your data feed, Internet service provider for your Web site, high-speed Internet, second business telephone line and cable TV service may be fully deducted if used strictly for business purposes.

Education Expenses: You may deduct the cost of education, including seminars, class tuition, books and other expenses, as long as the purpose of the class is to maintain or improve skills related to your current work.

This is just a partial list of your deductible expenses as a trader. Contact a Traders Accounting tax professional today. We can help you make the most of the business deductions available to you.

Jim Forrester, CPA is the Tax Director of Traders Accounting, the nation's leading provider of tax consulting, entity formation, tax preparation and 401(k) services to the trading industry. Traders Accounting teaches traders how to properly set-up their trading business and take advantage of all the money-saving tax strategies available to home-based businesses. Explore the website that Forbes has declared "Best of the Web" for six straight years and find out exactly how to make your trading into a 'business' and receive tax breaks and tax deductions worth up to $25,000 each year. Visit www.tradersaccounting.com for more info.