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Subject Author Date
Treatment of long-term capital gains for a C corporation Tony Cox 12-08-2006
Posted by Tony Cox on December 8, 2006, 2:45 am
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 Can someone give me an overview of how long-term capital
gains are treated for a small C corporation? I'll bring it
up with my CPA later, of course, but I like to have a
heads-up on how its all supposed to work. Running through
2005 1120, Schedule D and form 4797 I can't see how long
term is treated differently (on the bottom line, the tax
rate) from short term or for that matter other regular
income.

We're thinking about selling some real business property,
currently generating rental income, and expect a net gain of
around $100K. Property was put into service in 1999.
Typically, we're in the 15% bracket, but it seems that this
might throw us into the more aggressive bands.

Have I missed anything? Is there a reduced band for LTCG or
perhaps some credit on some other form that would reduce
liability? Might an installment sale be relevant? There are
no state tax consequences.

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Posted by Bill Brown on December 8, 2006, 3:23 pm
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 Tony Cox wrote:

> Can someone give me an overview of how long-term capital
> gains are treated for a small C corporation? I'll bring it
> up with my CPA later, of course, but I like to have a
> heads-up on how its all supposed to work. Running through
> 2005 1120, Schedule D and form 4797 I can't see how long
> term is treated differently (on the bottom line, the tax
> rate) from short term or for that matter other regular
> income.

Net long term capital gains inside a C-corp are taxed at the
corporation's marginal rate. There is no preferential tax
rate.

> We're thinking about selling some real business property,
> currently generating rental income, and expect a net gain of
> around $100K. Property was put into service in 1999.
> Typically, we're in the 15% bracket, but it seems that this
> might throw us into the more aggressive bands.

Your personal tax bracket is irrelevant until the
corporation pays dividends to you.

> Have I missed anything? Is there a reduced band for LTCG or
> perhaps some credit on some other form that would reduce
> liability? Might an installment sale be relevant? There are
> no state tax consequences.

An installment sale would spread out the tax liability but
it would also spread out the corporation's receipt of the
sales proceeds.

I'm skeptical that there are no state tax consequences. Many
states which do not tax individual income do tax corporate
income.

<< ======================================================= >>
<< The foregoing was not intended or written to be used, >>
<< nor can it used, for the purpose of avoiding penalties >>
<< that may be imposed upon the taxpayer. >>
<< >>
<< The Charter and the Guidelines for submitting posts >>
<< to this newsgroup as well as our anti-spamming policy >>
<< are at www.asktax.org. >>
<< Copyright (2006) - All rights reserved. >>
<< ======================================================= >>

Posted by Josh100 on December 8, 2006, 3:42 pm
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Tony Cox wrote:

> Can someone give me an overview of how long-term capital
> gains are treated for a small C corporation? I'll bring it
> up with my CPA later, of course, but I like to have a
> heads-up on how its all supposed to work. Running through
> 2005 1120, Schedule D and form 4797 I can't see how long
> term is treated differently (on the bottom line, the tax
> rate) from short term or for that matter other regular
> income.
>
> We're thinking about selling some real business property,
> currently generating rental income, and expect a net gain of
> around $100K. Property was put into service in 1999.
> Typically, we're in the 15% bracket, but it seems that this
> might throw us into the more aggressive bands.
>
> Have I missed anything? Is there a reduced band for LTCG or
> perhaps some credit on some other form that would reduce
> liability? Might an installment sale be relevant? There are
> no state tax consequences.

Unfortunately C Corporations don't have any tax benefit
comparable to an individual when it comes to capital gains.
There is a NCG (net capital gain) alternative tax rate of 35
percent that corporations can use. However, since the
maximum corporate tax rate is 35 percent, the alternative
tax is not beneficial. (IRC Section 1201)

Two more significant differences of capital gain treatment
between individuals and corporations exist...

1. Capital losses offset only capital gains. No deduction of
capital losses is permitted against ordinary taxable income
(whereas a $3,000 deduction is allowed to individuals.)
(Section 1211(a))

2. There is a three-year carryback and a five-year carryover
period for net capital losses. Corporate carryovers nd
carrybacks are always treated as short term, regardless of
their originl nature. (Secion 1212(a)(a))

It sounds like you are in a capital gain situation and not a
capital loss situation, so the last two listed differences
are just an FYI.

Hope this helps,

Josh100

<< ======================================================= >>
<< The foregoing was not intended or written to be used, >>
<< nor can it used, for the purpose of avoiding penalties >>
<< that may be imposed upon the taxpayer. >>
<< >>
<< The Charter and the Guidelines for submitting posts >>
<< to this newsgroup as well as our anti-spamming policy >>
<< are at www.asktax.org. >>
<< Copyright (2006) - All rights reserved. >>
<< ======================================================= >>

Posted by Tony Cox on December 9, 2006, 7:01 am
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Bill Brown wrote:
> Tony Cox wrote:

>> Can someone give me an overview of how long-term capital
>> gains are treated for a small C corporation? I'll bring it
>> up with my CPA later, of course, but I like to have a
>> heads-up on how its all supposed to work. Running through
>> 2005 1120, Schedule D and form 4797 I can't see how long
>> term is treated differently (on the bottom line, the tax
>> rate) from short term or for that matter other regular
>> income.

> Net long term capital gains inside a C-corp are taxed at the
> corporation's marginal rate. There is no preferential tax
> rate.

One wonders why, then, they bother to make the distinction
between LT and ST capital gain on form 1120 Sched D.

>
>> We're thinking about selling some real business property,
>> currently generating rental income, and expect a net gain of
>> around $100K. Property was put into service in 1999.
>> Typically, we're in the 15% bracket, but it seems that this
>> might throw us into the more aggressive bands.

> Your personal tax bracket is irrelevant until the
> corporation pays dividends to you.

It's the corporate rate I'm talking about.

>> Have I missed anything? Is there a reduced band for LTCG or
>> perhaps some credit on some other form that would reduce
>> liability? Might an installment sale be relevant? There are
>> no state tax consequences.

> An installment sale would spread out the tax liability but
> it would also spread out the corporation's receipt of the
> sales proceeds.
>
> I'm skeptical that there are no state tax consequences. Many
> states which do not tax individual income do tax corporate
> income.

Nevada doesn't.

<< ======================================================= >>
<< The foregoing was not intended or written to be used, >>
<< nor can it used, for the purpose of avoiding penalties >>
<< that may be imposed upon the taxpayer. >>
<< >>
<< The Charter and the Guidelines for submitting posts >>
<< to this newsgroup as well as our anti-spamming policy >>
<< are at www.asktax.org. >>
<< Copyright (2006) - All rights reserved. >>
<< ======================================================= >>

Posted by Tony Cox on December 9, 2006, 7:01 am
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Josh100 wrote:

> Unfortunately C Corporations don't have any tax benefit
> comparable to an individual when it comes to capital gains.
> There is a NCG (net capital gain) alternative tax rate of 35
> percent that corporations can use. However, since the
> maximum corporate tax rate is 35 percent, the alternative
> tax is not beneficial. (IRC Section 1201)
>
> Two more significant differences of capital gain treatment
> between individuals and corporations exist...
>
> 1. Capital losses offset only capital gains. No deduction of
> capital losses is permitted against ordinary taxable income
> (whereas a $3,000 deduction is allowed to individuals.)
> (Section 1211(a))
>
> 2. There is a three-year carryback and a five-year carryover
> period for net capital losses. Corporate carryovers nd
> carrybacks are always treated as short term, regardless of
> their originl nature. (Secion 1212(a)(a))
>
> It sounds like you are in a capital gain situation and not a
> capital loss situation, so the last two listed differences
> are just an FYI.

Thanks, Josh. It helps a lot. There may be more questions
when I've digested your response.

<< ======================================================= >>
<< The foregoing was not intended or written to be used, >>
<< nor can it used, for the purpose of avoiding penalties >>
<< that may be imposed upon the taxpayer. >>
<< >>
<< The Charter and the Guidelines for submitting posts >>
<< to this newsgroup as well as our anti-spamming policy >>
<< are at www.asktax.org. >>
<< Copyright (2006) - All rights reserved. >>
<< ======================================================= >>

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