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The Eighth Circuit upheld the Tax Court in ruling that a taxpayer's
business was not truly a trade or business and therefore all
deductions associated with it were disallowed.
(Montagne v Comr., No. 04-4137 8th Cir 2/7/2006
see links:
here,
here or
here )
Reasons stated for believing that the
taxpayer was not truly operating a business:
-
he did not have a written business
plan
-
he did not have financial projections
-
he did not have a separate bank
account for the business, rather he paid business expenses out of
the personal checkbook
-
he failed to generate separate
business records for the business activities
-
he failed to develop economic
expertise in the business
- he did not solicit expertise
from others regarding his business
Traders should take
heed.
- each year purchase books and
research material from
the bookstore
and save the receipts
- subscribe to IBD, WSJ,
Barrons, and several trader magazines, and retain those dog-eared
copies to show the IRS examiner
- keep taking continuing
education seminars & classes
- subscribe to internet chat
rooms for education and market information
- keep a separate brokerage
account for the business activity
- open a separate checking
account for the trading expenses
- obtain a separate credit
card for trade business expenses
- keep all business receipts
- document your travel and
automobile mileage
- document your entertainment
and meals listing Who was there; When it was; Where it was at; What
was discussed about the business; How much was spent; What was the
business relationship of the guests you were with. (a credit card
receipt documents many of these, so you might simply write the other
items on the receipt while you are filling in the tip)
- download and maintain proof
of your activity: trade confirmations, multiple fills, unfilled
limit orders, other activities accomplished throughout the day.
burn a copy to a CD-R for safekeeping
- maintain an excel
spreadsheet or use Money/Quicken to track your activity each week, or
preferably each day
- take pictures of your office
from time to time showing a business-like operation. (make
sure the ironing board and the kids' rocking horse are moved out of
the way first
 )
- keep a diary of your
activities, your telephone contacts, your automobile travel and so
on
- save stuff for at least
three or four years. the IRS can get a good impression if you can show
them the by-products of your research and technical analysis etc.
- obtain and save monthly
brokerage statements and annual summaries
- maintain executed securities trades
in a format similar to the IRS
Schedule
D
- retain a professional (CPA, EA, Tax Attorney) to
assist you
- form an entity to run the business through and
make sure it timely files a separate tax return
- hire helpers and pay them via actual payroll and
issue them a W-2 at year's-end.
- maintain an office. a home office is great,
an outside office is even better!
- have several monitors and a television in use to
track the markets
- have live data feeds for real-time quotes,
charts, breaking news
- have critical back-up: multiple computers
and
multiple means of accessing the markets etc.
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