Capital gains or losses are taxed differently. Profits are typically taxed as ordinary income at the “regular” tax rate. Gains or losses on investments or the sale of assets are taxed as capital gains or losses, but it can depend on the type of business.
Capital Gains and Capital Losses
Almost everything a business owns and uses is a capital asset. If the selling price of an asset is higher than the owner’s basis in that asset, the result is a capital gain. If the selling price is less than the basis, the result is a capital loss. Capital gains and losses are also experienced when a business writes off an asset, taking it off its balance sheet. It might be the case with accounts receivable when a debt is owed to the business but is unlikely ever to be paid for one reason or another.
Long-Term vs. Short-Term
Capital gains and losses come in two forms: long-term and short-term. Short-term gains or losses are those on assets that are held for a year or less before being sold. Long-term capital gains and losses resulting from the sale of assets that were held or owned for more than a year before being sold. Long-term gains are subject to tax rates up to 28% for sole proprietors and investors. The rate depends on your overall income—the more income he has, the higher the rate—and what exactly you’re selling. This tax rate also only kicks in if you had more capital gains for the year than capital losses and only applies to the surplus.
How Capital Gains or Losses Affect Business Owners
Capital gains and losses impact businesses owners in two ways—through the sale of stock and through the sale of business property. Individual shareholders or business owners who sell their capital shares or owner’s equity in a business also incur capital gains or capital losses from those sales. If you have gains or losses from selling business property like furniture, equipment, and machinery, they are ordinary gains. If a business bought a building for $800,000 and sold it six months later for $1,500,000, the difference would be a $700,000 short-term capital gain.
