Tax Implications of Investing as an LLC vs C Corp for Investment Trading

Thanks for that explanation. I'm still a bit confused about the trader vs investor distinction. How does the IRS determine which category I fall into? I plan to make around 25-30 trades per month, mostly in stocks and some options. Would that qualify me as a trader? Also, I've heard about the accumulated earnings tax for C Corps that retain too much profit. Is that something I should be concerned about if I'm planning to keep reinvesting within the corporation?

The trader vs investor distinction depends on several factors, not just the number of trades. The IRS looks at whether you're seeking to profit from daily market movements rather than dividends/appreciation, the frequency and dollar amount of trades, and whether trading is your primary business activity. With 25-30 trades monthly, you're in a gray area - not clearly a trader but more active than a typical investor. Each case is evaluated individually. Regarding accumulated earnings tax, yes, that's definitely a concern for C Corps retaining profits. The IRS can impose additional tax on retained earnings beyond $250,000 if they determine you're retaining profits without reasonable business needs. Investment strategies alone might not satisfy the "reasonable needs" test, making this a significant potential drawback to your C Corp strategy.

That sounds interesting. How exactly does the analysis work? Do you just upload documents or do they connect with your trading accounts? I've been keeping spreadsheets of my planned investment strategy but I'm not sure if that would be enough information.

I'm skeptical about these kinds of services. How do you know their recommendations are actually correct? Did you have a tax professional verify their advice or did you just take their word for it? Not trying to be difficult but I've been burned before by automated tax tools.

The analysis works by uploading any documents you have - trading records, tax returns, and even your planned strategy spreadsheets would be perfect. They don't connect directly to your trading accounts for security reasons, but you can export data from your platforms. The AI looks at your trading patterns, income levels, and goals to determine which tax structure aligns best with your specific situation. I actually did have my CPA review their recommendations, and he was impressed with the thoroughness. The difference is that taxr.ai specializes in investment entity structures specifically, whereas many general accountants aren't as familiar with the nuances. They provided IRS citations for all their conclusions, which my CPA confirmed were accurate. What convinced me was their detailed comparative analysis showing the 5-year tax implications of each option.

How does this actually work? Does it just keep dialing for you or do they have some special connection to the IRS? Seems weird that a third party could get through when regular people can't.

This sounds like a complete waste of money. IRS agents won't give you personalized tax advice over the phone - they'll just refer you to publications. And they certainly won't tell you "audit triggers." I've worked with the IRS for years and this service seems like it's selling false expectations.

The service uses an automated system that navigates the IRS phone tree and holds your place in line. They don't have special access - they just handle the waiting part so you don't have to stay on hold for hours. When they reach a human, they connect you directly with that IRS agent. I should clarify about the "audit triggers" - the agent didn't give me some secret list. What they did provide was clarification on the factors they look at when reviewing C Corps that primarily hold investments, specifically regarding accumulated earnings tax and personal holding company tax. You're right that they won't give personalized tax advice, but they did explain how certain regulations are applied in practice, which was extremely valuable. The key is asking the right procedural questions rather than seeking specific advice about your situation.

That's a really important point I hadn't considered. I'm in New Jersey. Do you know if NJ has any particularly favorable or unfavorable rules for investment LLCs vs Corps? Or would I be better off forming in a different state even if I live in NJ?

New Jersey is actually one of the more complex states for this situation. NJ has a Corporation Business Tax for C Corps (7.5%-11.5% depending on income) AND they tax S Corps at the entity level too, unlike many states. For LLCs, they have a $150 annual filing fee plus a per-member fee. Forming in another state while living in NJ generally doesn't help much. You'd still need to register as a "foreign" entity doing business in NJ and pay NJ taxes on income sourced there. Since investment income is typically sourced to where you're making the trading decisions (i.e., your home), you'd still face NJ taxes. Some people try using Wyoming/Nevada/Delaware entities with complex operating agreements to create distance, but the reality is that without substantial presence in those states, NJ can (and often does) assert tax jurisdiction. Your best strategy is probably to focus on optimizing within NJ's system rather than trying to use out-of-state entities.

I looked into this extensively. You're right that trading securities is excluded from QBI. However, if your LLC engages in other investment-related activities that DO qualify (like certain types of lending or investing in certain real estate activities), you could potentially get partial QBI benefits. It gets complicated fast though!

This is exactly the kind of comprehensive analysis I was looking for! The NIIT calculation really changes the math - I hadn't fully considered that 27.8% effective rate on LLC income vs the 21% corporate rate. One question about the capital loss carryforward benefit you mentioned - if I'm doing mostly short-term trading, wouldn't most of my losses be ordinary losses rather than capital losses? Or does the C Corp structure somehow convert trading losses to capital losses that can be carried forward more favorably? Also, regarding documenting business purpose for retained earnings - what kind of documentation would satisfy the IRS? Is it enough to have a written investment policy stating the corporation's growth strategy, or do they expect more detailed justification for each year's retained profits? The indefinite capital loss carryforward could be huge if I have a bad trading year early on. That alone might justify the C Corp structure even with the double taxation risk down the road.

Great questions! Regarding loss treatment - you're right to think about this carefully. For C Corps engaged in trading, the losses would generally still be ordinary business losses, not capital losses. The key advantage isn't about converting the character of losses, but rather that C Corps can carry forward ordinary business losses indefinitely (subject to certain limitations), while individual traders face the $3,000 annual limit on capital loss deductions against other income. However, if your C Corp is classified as an "investment company" rather than actively trading, then the losses would be capital losses with the indefinite carryforward benefit I mentioned. The distinction between trader vs investment company for C Corps follows similar but not identical rules to the individual trader vs investor determination. For documenting retained earnings business purpose, you'll want more than just a general investment policy. The IRS expects specific, reasonable business needs for the retained funds. Examples include: documented plans for expanding trading capital to take advantage of larger opportunities, maintaining cash reserves for margin requirements, funding technology upgrades or research tools, or accumulating funds for specific investment strategies that require substantial capital. Annual board resolutions explaining the business reasons for retention, along with supporting financial projections, are typically recommended. The key is showing the retention serves the business rather than just avoiding personal taxes.