Need Some Deductions for 2011?

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Updated for 2011

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How a Corporation Handles Capital Gains and Losses

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

Short-term and long-term capital gains are simply added to the corporation's regular income and taxed at the corporate income tax rates.

Capital gains and losses are separately calculated even though a corporation receives no preferential tax treatment for capital gains.

There was a time when corporations enjoyed lower capital gains rates. Although this is not currently the case, capital gains and loses are still classified as short-term and long-term.

Use the corporation's Schedule D for reporting capital gains and losses.

Net Capital Gains:

Capital gains in excess of capital losses are simply added to the corporation's other business income on Form 1120 and taxed at the same rates as the other income.

Net Capital Losses:

Capital losses in excess of capital gains are carried back 3 years, then, if not used up, carried forward up to 5 years.

In the year a net capital loss is originally created, it can't be used in that same year to reduce the corporation's other income for that year or create a net loss.

The carryback and carryforward rules must be applied.

Net capital losses carried back or forward, may only be deducted against net capital gains of the carryback or carryforward year.

A net capital loss carried to another year is treated as a short-term loss even if it was a long-term loss when originally incurred (the holding period was over 1 year). It does not retain its original character.

When carrying back losses, you must refigure your tax. Apply for a refund on either Form 1139,Corporate Application for Tentative Refund, or Form 1120X, Amended ended U.S. Corporation Income Tax Return.

Form 1139:

You'll get a faster refund if you file Form 1139. But it must be filed after you file the return for the capital loss year.

It must be filed no later than one year after the year the 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 capital loss sustained.

A capital loss incurred in any one year is deducted in the following order:

First, back 3 years prior to the year the loss was originally occurred. If not used up...
The 2nd year prior to the year the loss was originally incurred. If not used up...
The 1st year prior to the year the loss was originally incurred. If still not used up...
Carry it forward, up to 5 years maximum.

Example:

In tax year 2011 the corporation incurs a short-term capital gain of $2,000 and a long-term capital loss of $10,000.
This results in a net capital loss of $8,000 ($10,000 minus $2,000).
The loss is treated as a short-term loss in carryback and carryforward years.

Results:

You must first go back 3 years, to 2008, to see if you had any capital gains to apply the loss against; if not, check the 2nd year prior to the capital loss year, 2009, and so on.
It turns out, in 2008, the corporation had a short-term capital gain of $5,000 and a long-term capital gain of $2,000 (total capital gain of $7,000).
- 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 (this is the order you follow in deducting losses carried to other years).
You refigure your tax for 2008 and apply for a refund.

This leaves $1,000 of the carryback loss still unused.

You check tax year 2009 (the 2nd year prior to the capital loss year) and find a short-term capital gain of $1,000 and a long-term capital gain of $2,000.
You deduct the remaining $1,000 capital loss from the short-term capital gain of $1,000.
The carryback has now been used up.

You refigure your tax for 2009 and apply for a refund.

S-corporations: What is an S-corporation? What is a Pass-Through Entity; Limited Liability; Legal Status of an S-corporation; Tax Year

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