As a business owner, you must deal with some income tax concepts that most Americans don't have. One of these is capital gains. Capital gains can greatly affect your income tax bill, both positively and negatively. And they are one way to boost your company's bottom line. How? Here is a short guide to business capital gains.
What are Capital Gains and Losses?
Capital gains are the profits a business makes off the sale of an asset or investment. Large assets often must be capitalized — have their cost subtracted as an expense over a period of years rather than deducted in the first year. Examples of such assets include large equipment, real estate, computers and technology, copyrights, and investments (like stocks).
When the business then sells such a depreciated asset, the resulting money made over the cost is considered capital gains. The company must pay taxes on the gain and may deduct a loss against other income. The gain or loss is considered short term if it's held less than one year and long term if owned for more than that.
How Do Capital Gains Affect Taxes?
Capital gains are taxed at a different rate than ordinary income. The rules for what rate is applied depend on many factors, such as the type of asset and how depreciation was calculated. If the asset is sold at a loss on paper, that loss can be used to offset other earned income, resulting in a lower tax bill.
If your business has no taxable income in the year of the sale, a capital loss is carried back to the three prior years to reduce tax bills that have already occurred. If anything remains, it may be then carried forward for a reduction in future tax bills.
What Can You Do Affect the Outcome?
The rules that govern capital gains and losses are complex and strict. But you can still legitimately manage things to cause positive outcomes to the company's taxes. For instance, if you time the sale of a piece of equipment, you can take the best advantage of that deduction against income from a particular year. Many individuals and businesses perform what is called 'capital loss harvesting' at the end of a tax year to offset income.
Also, the decision as to how to deduct depreciation on an asset in the early years will affect how much of a gain or loss you take on it when selling it for fair market value later on.
Where Should You Get Help?
Because this is a complicated subject, work with an experienced CPA (certified public accountant) with business tax experience. They can guide you through the best options to minimize your tax obligation and maximize profits. Contact a CPA business tax accountant in your area to learn more about this important aspect of your company's finances.
Share5 September 2019
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