The Tax Cuts and Jobs Act (TCJA) of 2017 made some major changes to how corporations pay taxes.
The TCJA eliminated the graduated corporate tax structure as well as repealed the alternative minimum tax. Unlike pass-through entities such as S-corps, sole proprietorships, partnerships, and limited liability corporations, where income is passed through to owners and taxed at the individual taxpayer level, companies now pay a flat 21 percent corporate tax rate.
Companies pay capital gains taxes differently from other business structures. Below we’ll discuss how companies pay capital gains taxes versus pass-through entities.
Capital gains are the difference in price realized from assets divested for more than their original or adjusted cost basis. For most business structures and individual taxpayers, capital gains are treated more favorably than other forms of income.
While C-corps used to enjoy preferential capital gains treatment, tax policy has changed over time. Like individual taxpayers, companies that have realized capital gains must record them as either short-term or long-term gains on their Schedule D of Form 1040, which denotes capital gains and losses.
Capital gains tax rates for companies are equal to the ordinary corporate income tax rate.1
C corporations can deduct regular expenses from ordinary income but not capital losses. Companies can only claim capital losses to offset capital gains. Under current tax laws, C-corps with an excess of capital losses versus capital gains are allowed to either carry those losses back three years or forward five years to offset any future realized capital gains. Any excess capital loss that remains after carrying it forward five years cannot be used and simply expires.
Pass-through entities, meanwhile, pay taxes on any realized capital gains from their businesses the same as any capital gains realized from their personal investments. Short-term capital gains are treated as ordinary income and subject to the taxpayer’s nominal tax rate. Long-term gains – those held longer than a year – are subject to long-term capital gains tax rates of 0, 15, or 20 percent depending on the taxpayer’s filing status and income.
Corporations pay a flat corporate tax on revenue and realized capital gains. C-corps can use capital losses to offset capital gains, with some restrictions. Pass-through entities, however, enjoy preferential treatment of capital gains on assets held for longer than 12 months.
A certified tax professional can provide additional insight into capital gains taxation laws and regulations for individuals, pass-through entities, and corporations.
1Corporate Income Determination, PWC Worldwide Tax Summaries, https://taxsummaries.pwc.com/united-states/corporate/income-determination