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.
Net long term capital gains inside a C-corp are taxed at the corporation's marginal rate. There is no preferential tax rate.
Your personal tax bracket is irrelevant until the corporation pays dividends to you.
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.
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...
Capital losses offset only capital gains. No deduction of capital losses is permitted against ordinary taxable income (whereas a ,000 deduction is allowed to individuals.) (Section 1211(a))
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,
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
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.
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.
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