Capital Gains and Losses for C Corporations

The Tax Cuts and Jobs Act (P.L. 115-97) made major changes to the taxation of corporate taxpayers, including, but not limited to, replacing the graduated corporate tax structure with a flat 21% corporate tax rate and the repeal of the corporate alternative minimum tax (AMT), effective for tax years beginning after 2017. Many of the changes are discussed in Pub. 542.

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).

A regular C corporation is not a pass-through entity, it is a tax-paying entity; it pays its own taxes based on its own tax rate schedule.

Pass-through entities are not tax-paying entities, they are tax-reporting entities (with some exceptions for S corporations). Items of income, deductions, gains, losses, and credits are passed through the entity to the owners via Schedule K-1. All owners use Schedule K-1 to report their share of these items on their own personal income tax return.

No Preferential Tax Treatment for Long-term Capital Gains

Unlike individuals, who enjoy preferential tax treatment for long-term capital gains, C corporations don't get preferential tax treatment for long-term capital gains. A corporation's capital gains are simply added to its ordinary income along with all other income items.

C corporations Must Classify Capital Gains and Losses

There was a time when corporations enjoyed lower capital gain rates for long-term capital gains and were required to classify capital gains as short-term or long-term.

Although corporations no longer enjoy preferential tax treatment for capital gains, they still 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.

How C corporations Deduct Capital Losses

Unlike regular corporate expenses, which are deducted from the corporation's ordinary income, C corporation capital losses may not be deducted from a C corporation's ordinary income. Capital losses may only be offset against capital gains. If in any given tax year a C corporation's capital losses exceed its capital gains, the excess loss may not be deducted in that year. Instead, the current year's excess loss is carried to other tax years in a specific order and deducted from net capital gains in those years (if any gains exist)

Ordering Rule

C corporations must follow a specific order when carrying capital losses back and forward. 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.

A C corporation's excess capital loss in any given year is carried to other years in the following order:

• First, 3 years prior to the loss year
• Next, 2 years prior to the loss year
• Then, 1 year prior to the loss year
• Finally, 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 still remains, 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. For C corporations, the loss does not retain its original character. If you're carrying losses from more than one year, use the earlier year losses first.

  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 of that year, reducing the corporation's taxable income for that year. As a result, you must recompute the corporation's tax liability for that year. A lower tax liability results in a refund.

  Applying For a Refund

  Apply for a refund on either:

  • Form 1139, Corporate Application for Tentative Refund, or
  • Form 1120X, Amended ended U.S. Corporation Income Tax Return.

  Example:

  In 2015, 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.

  You first go back 3 years to 2012 to see if you had capital gains to apply the loss against. You had none in 2012. You go back 2 years to 2013 to see if you had capital gains in that year to apply the loss to. You had none in 2013 either. You go back 1 year to 2014 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 2014 and apply for a refund. The remaining capital loss of $1,000 ($8,000 minus $7,000) is carried forward up 5 years to 2020. If you have no capital gains during the 5 year carryforward period, the unapplied $1,000 loss is lost forever.

  Tax Planning Tip:

  Don't lose track of any unapplied capital losses, since they may be used to reduce capital gains during the 5-year carryforward period.

  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.