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Subject Author Date
Treatment of long-term capital gains for a C corporation Tony Cox 12-08-2006
Posted by Brian on December 9, 2006, 7:01 am
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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.

It is too late now; but, for future reference, never put
capital gain property into a C corp.

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Posted by Katie on December 9, 2006, 7:01 am
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 Josh100 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.
>>
>> 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.

Also, you should be aware that the gain does not keep its
character if the proceeds of the sale are distributed to you
as a dividend. A dividend from a C corporation is ordinary
income to the recipient, even if the income from which it
arose is capital gain to the corporation.

Katie in San Diego

<< ======================================================= >>
<< 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 12, 2006, 2:35 am
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> Josh100 wrote:

>> 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))

Just to clarify -- these capital loss carrybacks then can
only affect other SHORT TERM capital losses, right? One
can't offset them against other general income.

>> 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.

> Also, you should be aware that the gain does not keep its
> character if the proceeds of the sale are distributed to you
> as a dividend. A dividend from a C corporation is ordinary
> income to the recipient, even if the income from which it
> arose is capital gain to the corporation.

Well, as Brian pointed out, we probably ought not to have
purchased the property into a C corporation, but now we're
stuck with it. At the time, it all seemed reasonable -- this
is leasehold property, and the financial models showed it
appreciating for a while and then sliding down as the end of
the lease approached. We were never expecting to be up more
than a few thousand dollars. Now, unexpectedly, its worth
much more and how we dispose of it no longer a minor issue!
As I said before, we expect a net gain of around $100K.

I wonder if anyone would like to comment on the following
Just the jist will be informative and perhaps even
entertaining. I'll follow up later with my CPA anyway. Are
there other more fancy ways of dealing with this that I
might have missed??

1) Installment sale. Could the sale be spread over (say) 3
years somehow? I've seen this referred to before, but am not
sure how it is structured. I"d have thought the IRS would
deem the sale complete when title transfers. Would it make
any difference that the recipient was "related" to the
corporation (i.e., me), apart that is from making doubly
sure the transfer is at market rate?

2) Dissolve the corporation and transfer the property as
part of the final distribution without selling it. Would
this affect the corporation's ability to claim the 50%
capital gains exclusion under the section I can't remember
for now? The one you get if you're small and been in
business for more than 5 years? What would the resulting
basis be if the property continued in rental service?

3) Elect S-corporation status. We're now eligible for this,
and it might make sense for other reasons too. What are the
costs of electing this for an established business? I'm
pretty clear about tax consequences moving forward; its the
cost of election itself that I'm not so sure about. Assets
other than the real estate are just cash. How are NOL
carryovers affected, if at all? Presumably, after making the
election, the asset can be distributed and the proceeds
treated by the shareholders simply as long-term capital
gains in proportion to their shareholdings, which seems to
be the best one can hope for. Its getting there that might
be expensive.....

Thanks in advance to all that respond.

<< ======================================================= >>
<< 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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