The Difference Between Long-Term Capital Gain and Short-Term Capital Gain for a Corporation

Corporate offices are considered capital assets.

When corporations sell certain types of assets for amounts higher than they were purchased, the transactions are considered capital gains. Depending on how long corporations owned the assets determines if the gains are short- or long-term gains. The determination affects how they are taxed by the Internal Revenue Service.

Types of Capital Assets

Capital assets are not regular goods and products corporations sell to make profits; instead they are assets companies own that help them generate profits. Some capital assets include equipment and machinery, land, buildings and other real estate properties. Investment products such as stocks, bonds and commodities are also considered capital assets.

Time

The length of time assets are held by corporations before they are sold determines if the gains are short or long term. If corporations hold assets for one year and longer, the gains are considered long term. Gains from assets sold by corporations less than a year of ownership are considered short term.

C Corporations

Short- and long-term capital gains are taxed at different rates depending on the type of corporations. There are two types of corporations in the United States: S and C. Capital gains from C corporations, known as regular corporations, are taxed as ordinary income. This means tax rates as low as 15 percent are used to tax C corporations’ short- and long-term capital gains.

S Corporations

Short- and long-term capital gains are taxed differently under S corporations due to their tax models. Unlike regular corporations, business profits and losses, including short- and long-term capital gains, are not taxed at the company level. Instead they are passed down to corporate shareholders proportionate to the shares of stock they own and taxed on their individual tax returns. Capital gains are taxed at different tax rates, as well. For instance, shareholders receiving short-term capital gains from S corporations are taxed at rates that could reach 35 percent. Long-term capital gains are taxed at more favorable rates, as low as zero percent as of 2011.

References

• Internal Revenue Service: Publication 544
• Small Business Taxes and Management: Corporate and Individual Tax Data
• Saving to Invest: 2011 and 2012 Capital Gains and Losses: Tax Facts and Figures