For a variety of businesses that have chosen to incorporate, there are some unique aspects to consider when it comes to the taxes that your corporation will pay on capital gains, which are defined as the profits from the sales of any particular capital asset. These assets could be land, art or corporate stock, just to name a few. Consulting with your tax professional or accountant, such as HCS, LLC in North Richland Hills, TX, so that you can determine how much your corporation may have to pay in capital gains tax.
While they are generally included as part of your taxable income, capital gains are typically taxed at a lower rate. However, there is a range of rates that are imposed on a various types of gains, making it difficult for the average business owner to calculate their tax liability. Accountants can assist you in determining the tax rates that apply to your specific capital gains. Below are a few points to keep in mind about capital gains.
Capital Gain – Typically, they occur with a capital asset is sold or exchanged at a price higher than its basis (which is defined as the purchase price plus any commissions and the cost of any improvements, although you must account for any depreciations). Gains and losses are defined in nominal terms and are not adjusted to account for inflation.
Long-Term/Short Term Capital Gains – An asset is considered long term if it was held for over one year, but if the asset was held for one year or less, then it is considered a short term capital gain. Therefore, your tax liability may be affected by how long you choose to own your asset. However, it is important to discuss your plans for capital assets with your accountant, to understand your potential tax liability.
Capital Losses – These may be used to offset capital gains and up to $3,000 of other taxable income. Unused capital loss can be carried over to other years, so it is important to work with your tax professional or accountant to be sure that you credit your capital losses correctly.
Tax Bracket – Depending on your tax bracket, your capital gains tax may be higher. For example, those within the 15% tax bracket or lower will pay 10% on long term gains. However, those who are in a higher tax bracket will pay 20%. Various capital gains will also have specific rates based on their type. For example, recaptured real estate depreciation is taxed at the ordinary income tax rates, but there is a maximum percentage. The maximum rates for taxes apply under either the ordinary income tax or the alternative minimum tax (AMT).
Gifted Assets – The basis for a gifted asset is equal to the donor’s basis. If the asset is inherited to due to the donor’s death, then the asset is “stepped up” to the value of the asset on the date of the donor’s passing. This provision effectively exempts income tax from the gains on the assets held until death of the donor. Therefore, it is important to work with your accountant when assets are gifted to understand the potential tax liabilities.
C-Corporations – These corporations pay the regular corporate tax rates on the full amount of their capital gains. However, they may use their capital losses to offset these gains, but those losses cannot be used to offset other types of income.
Finally, you should be aware that capital gains may face potentially higher effective tax rates above any current statutory rates due to phase-outs that occur in the tax code. Therefore, you need to work with your tax professional or accountant to determine your tax liability based on your asset and the length of ownership. If it was a gift, then you have another set of circumstances to contend with that can affect the tax rate. When working with your accountant, be sure to lay out all potential capital gains for both you as an individual and the ones for your business. They will be able to assist you to plan for your capital gains in a way that allows you to minimize your tax liability by taking any applicable deductions or applying any capital losses.
It must also be noted that assets paying returns that would be classified as capital gains are typically riskier than average, so a lower capital gains tax is thought to encourage risk-taking and the expending of capital to investments. Call or click on the link below to connect with an accountant at HCS, LLC in North Richland Hills, TX, where our professionals can guide you through any questions you may have about your capital gains!
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