The Small Business Capital Gains Tax Explained

A small business capital gains tax is a tax on profits that where earned when a small business sells off it's capital assets at a greater price greater than their original purchase price. These capital assets can include stocks, bonds, real estate, office equipment and valuable artwork, among others. The small business capital gains tax works similarly to the capital gains tax on the individuals. However, because the tax involves business assets and thus, by extension, everybody who works for that business, the stakes are much greater. That is why it is very important that the small business owners understand the ins, the outs and the implications of the small business capital gains tax.

Short-Term Capital Gain vs Long Term Capital Gain

Capital gains  can be divided into two groups - short-term capital gains and long-term capital gains. The former are capital gains made less than a year after the assets were originally purchased, while long-term capital gains are gains made after any period longer than a year. The short-term capital gains are taxed at 10 -35 percent (depending on the value of the gain) The long-term capital gains are taxed at 15 percent regardless of the value of the gain. The only exceptions to this are long-term gains from the sale of collectibles, which are taxed at 28 percent.

Suffice to say, this means that, on average,taxes on long-term gains are less of a financial burden on the small business than the taxes on short-term gains.  Furthermore, the long-term capital gains are only taxed on the year during which the assets are sold. This allowed small business owners to avoid paying capital gains taxes by delaying the sale for another year (or more). It also gives them more time to earn profits, which somewhat diminishes the tax burden. On the other hand, the longer the businesses avoid selling their assets, the more likely it is that the assets will lose value.

Capital Gains vs Capital Losses - Finding the Balance

However, the above-mentioned loss of value isn't necessarily a disadvantage. When the business face capital loss - the loss of profits that results from selling the assets below their original value - they can use said loss as a tax credit. This means that while they would still have to pay taxes on capital gains, they would be able to save some money as well. This is why small businesses usually try to offset their capital gains taxes by selling some of their assets at a loss. If they can somehow find the way of making their capital gains equal their capital losses, they would essentially avoid paying small business capital gains taxes altogether.

The Double Taxation Issue

When a business, even if it is a small business, earns profit, the small business owners wind up facing double taxation. They will have to pay the personal capital gains tax along with a small business capital gains tax. That's because, when the business' assets are sold, the owner profits as an individual, even if the funds go to the business he or she owns. The only way to avoid double taxation is to classify the business as a S corporation. Under classification, the owners would still have to pay a personal capital gains tax, but heir companies will be exempt from the small business capital gains tax. While the businesses do have to meet certain requirements, small businesses are more likely to meet them than other types of businesses.

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