When companies buy and sell capital assets, they're subject to capital gains tax, similar to individuals. The tax rate for capital gains is lower in many cases than regular tax rates, except in the case of a C-corporation. If you have a business set up as a pass-through entity, you'll pay capital gains tax rates that vary according to your overall income and tax bracket.
What Does Capital Gains Rate Mean?
When a small business sells off assets such as stock held in another company, office equipment, real estate, valuable artwork and certain other capital assets, it might receive more for the item than it originally paid. This difference is termed a capital gain. The item's original cost is called its basis, and whenever a business sells an asset for less than its basis, the company incurs a capital loss. Conversely, it has a capital gain whenever it sells an asset above its cost basis.
Capital gains get classified into short-term and long-term categories, based on how long the business has held the asset. The gain on any asset sold within one year of purchase creates a short-term capital gain, while an asset sold after being held for more than one year creates a long-term capital gain.
What is the Capital Gains Rate for Small Businesses?
For a small business, capital gains are taxed as regular income to the company if they qualify as short-term. Long-term capital gains receive a different tax treatment, with taxes of zero, 15 or 20 percent for all pass-through entities, such as a partnership, LLC or S-corporation. The tax rate varies with the owner's income and tax bracket. C-corporations pay their regular corporate tax rate on capital gains, but retain the benefit of being able to use any capital losses to offset capital gains, but not other types of income.
Doing Your Small Business Taxes
If your business has sold any assets with a resulting capital gain or loss, you need to show the transaction on your company's tax return. Use Internal Revenue Service (IRS) Form 8949, Sales and Other Dispositions of Capital Assets, to show the sale and calculate the business capital gain or loss. You also need to complete and submit the transactions in summary form on Form 1040, Schedule D, Capital Gains and Losses.
Deferring the Tax
If a company prefers to defer capital gains taxes it can simply defer the sale of the asset. If the company chooses to sell a real estate asset, it can avoid paying tax on any capital gain by doing a like-kind 1031 exchange. Under Internal Revenue Code Section 1031 Exchange rules, a business has 45 days to identify a like-kind replacement property, and 180 days to finalize a purchase of the property, to avoid paying capital gains tax on the original property sale. Any other non-like-kind property or cash included in the purchase is subject to capital gains tax.
Cynthia Gaffney has spent over 20 years in finance with experience in valuation, corporate financial planning, mergers & acquisitions consulting and small business ownership. She has worked as a financial writer and editor for several online finance and small business publications since 2011, including AZCentral.com's Small Business section, The Balance.com, Chron.com's Small Business section, and LegalBeagle.com. A Southern California native, Cynthia received her Bachelor of Science degree in finance and business economics from USC.