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Capital Gains and Losses for C Corporations

How Capital Gains Are Taxed at the Corporate Level

The lower capital gain rates enjoyed by individuals are not available to C corporations.

Unlike S corporations, which are pass-through entities, C corporations are not pass-through entities. Therefore, short-term and long-term capital gains are simply added to the corporation's ordinary income and taxed at corporate tax rates (C corporation's have their own tax rate schedule).

C corporations Must Classify Capital Gains and Losses:
There was a time when corporations enjoyed lower capital gain rates. Although corporations no longer receive preferential tax treatment for capital gains, they must continue to classify capital gains and losses as short-term and long-term. The corporation's Schedule D is used to report capital gains and losses.

Capital Losses Incurred By Corporations

Corporations may only offset capital losses against capital gains. They may not deduct them from the corporation's ordinary income. Net capital losses must first be carried back 3 years and offset against capital gains, if any.

If a loss is not fully applied against capital gains in the carryback period, the remaining loss may be carried forward up to a maximum of 5 years. If after carrying back a net capital loss 3 years and forward 5 years, part of the loss remains unapplied, it is lost forever.

Recomputing Tax Liability

When a net capital loss is carried back to a year that has a capital gain, the loss is subtracted from the gain reducing the corporation's taxable income. As a result, you must recompute the corporation's tax liability for that year.

A lower tax liability results in a refund of overpaid taxes. Apply for a refund on either Form 1139, Corporate Application for Tentative Refund or Form 1120X, Amended ended U.S. Corporation Income Tax Return.

If a capital loss exceeds a capital gain, the excess loss may not be used to reduce ordinary income or create an operating loss.

Form 1139

You'll get a faster refund if you file Form 1139. But it must be filed no later than one year after the year the net capital loss was incurred.

Form 1120X

You must file this form if you don't file Form 1139. It must be filed within 3 years, including extensions, from the due date for filing the return for the year in which the net capital loss was incurred

How to Carry Back a Net Capital Loss

You may not pick and choose what year to carry a loss to . Here's the order you must follow to apply a loss:

  • First, go back 3 years prior to the year of the loss.
  • If part of the loss still remains, go to the 2nd year prior to the year of the loss.
  • If part of the loss still remains, go to the 1st year prior to the year of the loss.
  • If part of the loss still remains, carry it forward up to a maximum of 5 years.
  • Any net capital loss remaining after carrying it back 3 years and forward 5 years, is forfeited.

Example:

  • In 2013, the corporation incurs a short-term capital gain of $2,000 and a long-term capital loss of $10,000.
  • After netting the gain and loss, you end up with a net capital loss of $8,000. The net capital loss is treated as a short-term loss in the carryback and carryforward years.

Results:

  • First, go back 3 years to 2010 to see if you had capital gains to apply the loss against.
    • You had none in 2010.
  • Go back to 2011 to see if you had a capital gains in that year to apply the loss to.
    • You had none in 2011 either.
  • Go back to 2012 to see if you had capital gains in that year to apply the loss to.
    • Turns out you did. You had a short-term capital gain of $5,000 and a long-term capital gain of $2,000.
  • You first reduce the short-term gain by $5,000, zeroing it out.
  • Then, you reduce the long-term gain by $2,000, zeroing it out.
  • You refigure your tax for 2012 and apply for a refund.
  • The remaining capital loss is $1,000 ($8,000 minus $7,000) must be carried forward 5 years. If you have no capital gains during the 5 year carryforward period, the unapplied $1,000 loss is lost forever.

Capital Losses from More than One Year

If you're carrying losses from more than one year, use the earlier year losses first.

Tax Planning Tip

Make sure you keep track of your capital gains and losses. As you can see from the example, if you end up having a capital gain of $1,000 in any year during the 5-year carry-forward period and you lose track of the unapplied net capital loss of $1,000, taxable income for the year the capital gain was included in income will be overstated by $1,000 and your corporation's tax liability will be higher.

Capital Loss Treatment - Corporations vs Individuals

Capital Loss Treatment: C corporations vs Individual
  Corporations Individuals
Preferential tax treatment for long-term capital gains No Yes
May carry back capital Losses Yes
(3 years)
No
May carry forward capital losses Yes
(up to 5 years max. Any unapplied loss is lost.)
Yes
(indefinitely, until used up)
May deduct net capital losses from other types of income No
(may deduct from capital gains only)
Yes
(may deduct from other income items reported on Form 1040)