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Capital Gains and Losses for C Corporations

Tax Treatment of Capital Gains and Losses for C corporations

The tax treatment of capital gains and losses for regular C corporations do not apply to individuals or pass-through entities (i.e., S corporations, partnerships, and LLCs that did not make an election to be taxed as a C corporation). Income and losses of pass-through entities are passed through the entity to the owners, who then report these items on their individual income tax returns where the tax rules for individuals apply.

For example, long-term capital gains are taxed at the lower capital gain rates for individuals. C corporations do not get preferential tax treatment for long-term capital gains. Instead, C corporations simply add net short-term and net long-term capital gains to the corporation's ordinary income. In addition, the tax rate schedule for C corporations is different from the tax rate schedule for individuals.

Moreover, individuals may deduct a net capital loss up to $3,000 annually and must carry the excess over $3,000 to the following tax year. Individuals may not carry a capital loss back to a prior year. However, individuals may carry an excess loss over $3,000 forward indefinitely.

C corporations may carry a net capital loss back three years and forward up to a maximum of five years. If part of a capital loss remains after carrying it forward up to five years, it is lost forever.

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.

C corporation Capital Losses

A C corporation can deduct capital losses only up to the amount of its capital gains.

If in any given tax year, a C corporation's capital losses exceed its capital gains, the excess loss cannot be deducted in that year. Instead, it carries the current year's excess loss to other tax years in a specific order and deducts the excess loss from any net capital gains, if any, that occur in those years.

In other words, unlike regular corporate expenses, a net capital loss cannot be deducted from a C corporation's ordinary income; it can only be deducted from capital gains.

A C corporation's net capital loss is carried to other years in the following order:

  1. 3 years prior to the loss year
  2. 2 years prior to the loss year
  3. 1 year prior to the loss year
  4. Any loss remaining is carried forward for 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.

When you carry a net capital loss to another tax year, treat it as a short-term loss even if it was a long-term loss. The loss does not retain its original identity.

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) is carried forward up 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.

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.

Capital Loss Treatment of C corporations vs Individuals

Capital Loss Treatment: C corporations vs Individual
  C 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)