Advantages and Disadvantages of Capital Gains to Business

Advantages and Disadvantages of Capital Gains to business

In the article; Zero to 60- What Business Owners Need To Know About Capital Gains discusses how capital market works, and the advantages of learning how it works. While designing incentive for stock plans and the way it is structured, it affects the amount of tax incurred by executives. While a business owner is paying tax, timing is a crucial factor as it will affect his/her overall tax payment as short-term rate is 39.6% while long-term is 20% (Parrish, 2014). It is important to learn how capital gains works in order to avoid double taxation. For example, when a corporation is involved in the sale of an asset, the corporation tends to pay tax from the sale of the asset gains and later pay tax while distributing proceeds to the selling owner causing double taxation. 

As part of owning a business, taxes are inescapable but a business can be smart on ways to manage them. This would be achieved by understanding the advantages and disadvantages of capital gains in order to maximize on the bottom line. When a seller sells an asset at a profit, it calls for a reason to celebrate but managing the capital gain arising from this sale may have a great impact to the business. Akhtar (2014) explained that capital gains main advantage is the fact that it offers a federal tax rate of 20% which is favorable for both married and individual tax payers. 

This business capital gain is enjoyed by the business in terms K1 pass-through taxation form, issued by LLC or S Corporation in transferring the financial benefit to individual owners instead of the corporation.  Before the sale of an asset, business owners should consult their financial advisors or accountant to understand the implications and options that the sale will have to their personal income and business tax rates. If a business is able to enjoy capital gains advantage, one key benefit they should expect is more cash reserves that can be used in investments due to less tax paid in comparison to ordinary tax. However, there exists one drawback in that investments are found in the account book which requires detailed accounting leading to delayed tax return and company financials.

References 

Akhtar, S. (2014). Capital Gains Tax in Theory and Practice. VISION : Journal Of Indian Taxation, 1(1). http://dx.doi.org/10.17492/vision.v1i1.2417

Parrish, S. (2014). Zero To 60: What Business Owners Need To Know About Capital Gains. Forbes.com. Retrieved 1 October 2016, from http://www.forbes.com/sites/steveparrish/2014/03/24/zero-to-60-what-business-owners-need-to-know-about-capital-gains/#675eb94a2da0

Response to Jennifer Croad

Hi Jennifer, I like you discussion and the way you have expounded on capital gains. You have discussed ways in which business owners can land to double taxation and how to avoid the same. Your discussion on that a sale of partnership interest is required to understand is very essential because hot assets can be classified as ordinary income and taxable. You have also discussed the triple taxation plight which occurs when income taxes are paid by corporation towards the corporate interest, income tax is paid by the shareholders on corporation profits after receiving dividends and after shareholders sell their stock, they pay tax on income gain. 

I also agree with you that the timing and nature of business sale can greatly affect the business owner’s overall rate of personal taxes. Capital gains occur after a sale of an asset by the business at a greater price than what they bought it. There is no zero-sum game, but depending on how it is managed, a company may have either advantages or disadvantages. However, capital gains should not be considered as income as they have their own tax rates. As financial advisor or business owner, how would you ensure that you enjoy smart investments to benefit the business?

Response to Adrienne Gilber

Hello Adrienne I like how you have discussed the capital gains concept. You have discussed planning opportunities that are beneficial to an independent or corporate business in selling your partnership interest, may convert long term capital gain into ordinary income. You have discussed that with sole proprietorships the owner does not pay local, state or federal income tax as a business entity but all the income is taxed as simple income to the owner. Similarly another important aspect that you have discussed is the importance of timing and nature of a business sale which affects the overall personal taxes. 

Business owners and individual should understand that capital gains are not a zero-sum game but depending on how a person manages it and subsequent investments that the business makes, the entity may either enjoy advantages or disadvantages. One advantage would be more cash reserves that will be available for investing due to the less tax paid in comparison to typical income. One factor to always to consider is that a taxpayer is not allowed to deduct losses after selling their stock and the taxpayer will still owe taxes even while the gains are less than total losses. How will you ensure that a company gains advantage to capital gains?