QUESTION on How to Reduce Capital Gains Tax of a C Corporation
I own a small C corporation and am in the process of selling a plot of land, However since I am a C corporation I will be getting taxed almost 35% is there anything I can do to avoid getting taxed such a high rate?
– John Hapner, FL.
ANSWER by Chrissie Mould
I always recommend consulting a CPA or tax professional in a case like this, but I doubt there is anything that can be done at this point to avoid the high capital gains tax.
However, there is another issue you may not have considered–double taxation. In addition to the tax your corporation will have to pay on its corporate gain, you will be required to pay individual income tax on the amount you receive from the remaining proceeds of the sale. Depending on your personal income tax rate, you could possibly end up with less than half of the sale price of the land!
You may want to consider electing S corporation tax status for your corporation. An S corp is an entity with “pass-through” taxation, meaning that the income of the S corp is passed through to its owner(s) and taxed at the owner(s)’ personal income tax rates. While converting to S corp status will not free you of the capital gains tax on the impending sale of the land (newly converted S corps come with a built-in capital gains tax for a period of 10 years from the date of the S corp election), you will be able to avoid the double taxation, because the income of the S corp will be taxed only once at your personal income tax rate instead of twice when you take a distribution of earnings from the corporation.
If electing S corp status sounds like a viable option for you, please note that time is of the essence. A corporation must elect S corp status by filing Form 2553, “Election by a Small Business Corporation”, with the Internal Revenue Service before the 16th day of the third month of the tax year in order for the S corp status to take effect in the same tax year. See the IRS instructions for Form 2553 for more information, including the conditions that must be met by corporations that wish to elect S corp status.
Regular “C” corporations are generally not considered to be the best entities for holding real estate from a tax standpoint. An S corp or other entity such as a limited liability company (or “LLC”) may prove to be a better vehicle depending on the situation. Hindsight being 20/20, you may just have to chalk this one up to a learning experience and plan ahead for the next time you acquire assets for investment or resale purposes.
Recommended Books on Reducing Tax of a Corporation:
- Capital Gains Tax Roll-over, Hold-over and Deferral Reliefs 2011/12
- 300 Business Deductions Available to C Corporations: List Of Over 300 Possible Deductions Every C or S Corporation Should Be Aware Of To Legally Minimize Their Taxes
- C-Corporations: Small Business Start-Up Kit (Small Business Start-Up Kits)
- LLC vs. S-Corp vs. C-Corp Explained in 100 Pages or Less
- How a Corporation Can Elect to be an S Corporation
- Forming an LLC and Electing to be Taxed as an “S” Corp
- LLCs and C Corporations: Similarities and Differences
- How to Convert a Sole Proprietorship to an LLC
- How to Add an Officer to an S Corporation