tax deduction of LLC

[guanch1984]

I have setup a LLC in North Carolina, and moved my joint stock investment into LLC. I plan to use business expenses, health care expense and retirement plan to lower net profit from portfolio. I was wondering if this operation is legal. How is this different from tax avoidance since in reality I am managing my own portfolio, and use LLC to avoid tax ?

[Anonymous_]

First of sil, you mentioned that you moved your joint stock investment into the LLC. Is there another party involved in the LLC? 

Further, you will not be able to use this LLC to reduce your federal income tax liability that accrues from your investment activities unless those activities rise to the level of a trade or business (which is highly unlikely).

[guanch1984]

No, it is a single member LLC. but investment account is a joint account currently. 

Can you clarify your last statement ? 

I am under the impression that if portfolio is owned by LLC, then profit generated by portfolio is considered as profit to company, why can't you use business expense to deduct part of profit ?  

[Anonymous_ · Accepted solution]

You simply cannot transform what is considered to be investment (or portfolio) income/gain into profit from a trade or business by transferring assets to an entity, such as an LLC, partnership, or S corporation.

Please consult with a local tax professional or a financial advisor. 

[rjs]

"moved my joint stock investment into LLC."
"investment account is a joint account currently."

Those two statements are contradictory. If the brokerage has the account registered as a joint account, then it is not owned by the LLC. You really need to talk to a professional about what you are doing.

[Critter-3]

I also highly recommend talking to a local tax professional before doing anything. What you think you can do what you can do are two separate things.

[Mike9241]

put another way as an investor, trading securities is not a business. therefore none of the profits is earned income. in addition, without earned income no pension contribution, no deduction for self-employed health insurance and investment expenses, except margin interest,  would not be deductible for federal income tax purposes. 

another downside as an LLC, unless it is in a community property state, is that an annual partnership return would probably need to be filed since there is joint ownership of the assets, this wouldn't change how things are taxed. 

but perhaps you are a trader which would change things. talk to a tax pro who can properly analyze your situation. 

[Opus 17]

A single member LLC is a disregarded entity, meaning that you and the LLC are the same and you file one tax return.  You can hold investments in an LLC but you pay the exact same taxes as if you held them as an individual.  (LLCs are creations of state law and are not recognized in federal law, so the IRS treats them as sole proprietorships for tax purposes.  You and the LLC are the same thing.)

You can't move jointly owned property into a single member LLC unless the other owner(s) surrender their ownership rights.   If we suppose that you had a joint broker account with your spouse, and you transferred ownership of the stocks to your single member LLC, does your spouse know they are no longer a joint owner?

What you seem to be trying to do is lower your taxes with a misunderstanding (at best) or an illegal scheme (at worst). Please get professional advice.  

[Critter-3]

A single member LLC that's a disregarded entity that only has a broker's account in it is not reported on a schedule  c instead it's put on the schedule d as if the LLC was never created. Putting a broker's account in LLC is a waste of time. If the brokers account is in a multi-member LLC then you need to file a partnership return form 1065 however the nature of the income is still investment. Please seek out local professional advice so you can learn the federal and state rules that governs this kind of activity.

[guanch1984]

Thanks for the reply, I think I understand now the capital gain is not considered business income, so it does not matter if it is in personal or LLC (single owner) account. They are taxed the same way. 

What if, I setup a C-corp as a managing company, and LLC as a managed partner and member. I pay managing fee (basically capital gain) from LLC to c corp, then within C corp, I pay corporation tax on managing fee ? Is this a legal approach ?

[Mike9241]

consult a tax pro. 

[Opus 17]

@guanch1984 

Long term capital gains are already taxed more favorably than any other kind of income. What kind of advantage do you think you will gain by changing the structure of the ownership of the investments?  I am not an expert on corporate taxes, but a quick Google search suggests that corporate income tax rate is 21%, while the long-term capital gains rate for individuals is 15% or 20%.

[Anonymous_]

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@Opus 17 wrote:

.....a quick Google search suggests that corporate income tax rate is 21%........

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Exactly, and in this instance it would also be considered a PHC.

See https://www.irs.gov/faqs/small-business-self-employed-other-business/entities/entities-5

Ultimately, trying to structure this scenario differently so as to avoid tax on capital gains is pretty much a waste of time and effort.