“I want to achieve the following.Is an S-Corp the right business structure for me?”---> I guess it depends on your personal financial situation; it is a smart idea to incorporate your day trading into an S-Corporation. With an S-Corporation you have similar right without the double taxation of C-corporations. With an S-Corporation you can pay yourself and therefore build up social security benefits. The 475(f) selection allows you to deduct all losses without limitation, count gains as ordinary income, and avoid the wash rules which don't allow you to count losses on identical securities. Some experts generally do not recommend the use of an S Corporation for trading however, depending on the individual facts and circumstances they may beneficial. S Corporations are pass-through entities, which means income or loss flows through to the individual. If an S Corporation makes a profit it is required to pay the owners a reasonable salary subjecting the business to payroll reporting. When this happens, of course you must pay payroll taxes (13.3% for 2011, NOT 15.3%). In the LLC information, when you trade in an LLC taxed as a partnership you are not subject to payroll or payroll tax.
“1.) I want to pay myself monthly from the Profits from Trading( Capital gains).”----> 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.) I want to deduct all Business expenses incurred for Trading like Internet Usage Fee, Cell Phone, Laptop etcetc. “---->Yes you can; 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.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).
“I am thinking I will not qualify under IRS definition of "Securities Trading Business"as the vol of trades is only 8 a month and trading is NOT my primary job.”----> To determine whether an individual is in the business of trading, as a Sole Proprietor, the IRS looks at three main factors.You must seek to profit from daily market movements in the prices of securities, Your activity must be substantial, and You must carry on the activity with continuity and regularity.
Please visit the IRS website here:
Tax Topics - Topic 429 Traders in Securities (Information for Form 1040 Filers) Day Trader Taxes: Day Trader vs. Investor - IRS discussion
“Can deductions be taken if the S-Corp only has Capital gains as the only money coming in?.”----> 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. Your 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. Shareholder-employees are taxed on their wage income and on any profits distributed by the S-Corporation. Profit distributions, however, are not subject to FICA payroll taxes; they are subject only to the shareholder's income tax rate.
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