Capital gains and losses of corporations are subject to special reporting, computation, and carryover rules that do not apply to other types of corporate income and loss. Therefore, it is important for a corporation to separately track and account for capital gains and losses from sales and dispositions of its capital assets.
Forms for Reporting Capital Gains and Losses
Most of a corporation’s short- and long-term capital gains and losses are initially reported on Form 8949 (Sales and Dispositions of Capital Assets). The capital gains and losses reported on Form 8949 and other forms are carried over to Form 1120 Schedule D (Capital Gains and Losses).
Short-term gains and losses are netted in Part I of Schedule D. Long-term gains and losses are netted in Part II. Then any net short-term gain or loss is combined with any long-term gain or loss. The resulting net capital gain or loss is treated as a short-term capital gain or loss.
A net capital loss may be carried back three years and forward five years as explained below.
Treatment of Net Capital Gain
Generally, net capital gain from Form 1120 Schedule D is reported in the income section of Form 1120 on line 8.
If a corporation has a net capital gain, the gain reduces or eliminates any net operating loss for the tax year. Net capital gain, however, is first reduced by any net capital loss carryforward.
Example: ABC has a net operating loss in 2019 of $100,000 computed without regard to a $10,000 net capital gain. The $10,000 net capital gain (after reduction by any capital loss carryforward from a prior year) reduces the net operating loss to $90,000.
If there is no net operating loss exclusive of the gain to offset, the net capital gain is combined with the corporation’s other taxable income. Net capital gain is subject to the same tax rate as the corporation’s other taxable income.
Net capital gain is not carried back or forward to other tax years.
Tax Rate on Net Capital Gain
Effective after 2017, corporate taxable income is subject to a flat 21% rate. Net capital gains included in taxable income are subject to the 21% rate.
Carryback and Forward of Net Capital Loss
If a corporation reports a net capital loss on Schedule D, the loss is carried back for three years and then forward for five years to offset any net capital gain in the carryback and carryforward years. Net capital gain is the excess of all capital gains over all capital losses.
The portion of a net capital loss which is not offset in the eight carryback and carryforward years is lost. Net capital loss may only offset net capital gain in the carryback or carryforward year.
There is no election to forgo the three-year carryback period.
An unused net capital loss carryforward is entered on line 6 of Schedule D as a short-term capital loss and taken into account in computing the net capital gain or net capital loss for the current tax year.
Planning Tip. For tax years beginning before 2018, corporate tax rates were as high as 38 percent and this rate also applied to net capital gain. For some corporations, it may be possible to intentionally maximize capital losses that are eligible for carryback to pre-2018 tax years in order to offset net capital gain subject to these higher rates.
Order of Carryback and Carryforward
Net capital losses from different tax years are carried back and forward in the order in which they arose. Thus, the net capital loss from the earliest loss year is used first.
Example: ABC corporation has net capital losses of $100,000 in 2019 and $250,000 in 2020. ABC has net capital gains, exclusive of loss carryforwards, of $50,000 in 2016, 2017, and 2018, and 2021. The $100,000 2019 loss offsets $50,000 of net capital gain in 2016 and in $50,000 in 2017. $50,000 of the $250,000 2020 net capital loss offsets $50,000 of net capital loss in the 2018 carryback year and $50,000 of net gain in the 2021 carryfoward year. The remaining $150,000 loss is available for carryforward in 2022 – 2025 to offset any net capital gain in those remaining carryforward years.
A net capital loss carryback or carryforward reduces net capital gain in the carryback or carryforward year before the net capital gain is reduced by an NOL carryback or carryforward.
Example: Corporation ABC has a net operating loss carryforward of $100,000 from 2017 and a net capital loss carryforward of $10,000. In 2019 ABC has $50,000 of taxable income exclusive of a $15,000 net capital gain. The $10,000 net capital loss carryforward offsets $10,000 of net capital gain in 2019. The $100,000 NOL carryforward offsets $55,000 of taxable income which includes $5,000 of net capital gain.
Caution. NOLs arising in tax years beginning after 2017 may only offset 80 percent of taxable income in a carryforward year.
Carryback May Not Cause or Increase NOL
The carryback of a net capital loss may not increase or cause a net operating loss.
Example: In 2016, a corporation has a $20,000 net operating loss exclusive of net capital gain and a $25,000 net capital gain. The corporation has a net capital loss of $20,000 in 2019. Only $5,000 of the 2019 capital loss may be carried back to 2016 to offset $5,000 of net capital gain. $20,000 of the net capital gain in 2016 offsets the net operating loss in 2016, leaving $5,000 of net capital gain. If the carryback were allowed to reduce a greater amount of net capital gain the corporation would have a net operating loss in 2016.
Claiming Refund from Net Capital Loss Carrybacks
A corporation may file an amended return for the carryback year on Form 1120X within three years of the due date of the loss year return. A tax refund is determined by recomputing the tax due for the carryback year by taking into account the allowable carryback deduction. The amended return cannot be filed until the corporation files its return for the loss year.
A corporation can also get its refund by filing Form 1139, Corporation Application for Tentative Refund. Form 1139 may be filed no sooner than the date the income tax return for the loss year is filed and no later than 12 months following the close of that year. The IRS will process a Form 1139 more quickly than an amended return. In fact, a 90-day time limit applies. If the IRS disallows the refund claim, the corporation must file an amended return and then challenge disallowance of the amended return refund claim in court.
For additional information on the taxation of corporate capital gains and losses, see CCH Answer Connect Topic Page entitled Corporate Capital Gains and Losses.
By Ray G. Suelzer, J.D., LL.M.