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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)
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
Trades 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.
- 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 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 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,
multiple means of accessing the markets etc.
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