Considering Capital Gains and Losses When Choosing a Business Type

Capital Gains and Losses

A business that sells or otherwise disposes of capital assets will have a capital gain or capital loss from the transaction. Capital assets are defined by Internal Revenue Service regulations and generally include everything a business owns except property held for sale to customers, most accounts or notes receivable, real and depreciable personal property used in the business, copyrights and similar intellectual property, and certain government publications.

Sole Proprietorship

For individuals, the maximum tax rate on long-term capital gains is 15 percent (5 percent for individuals up to the 15 percent bracket). In order to qualify as a long-term capital asset and thus subject to these more favorable rates, the asset must be held at least twelve months. Generally speaking, capital gains and losses are offset against each other, and a net capital loss can be used to offset up to $3,000 of ordinary income ($1,500 for married individuals filing separately). Capital losses that are not fully used in a tax year may be carried over to future years until offset entirely.


Gains and losses from the sale or exchange of capital assets are reported on the partnership return and retain their character when passed through to the partners. The partners treat capital gains and losses that pass through to them in the same manner as other individuals. (See discussion of Sole Proprietorships, above.)the maximum federal tax rate on a corporation’s capital gain is 35 percent. A corporation may deduct capital losses only up to the amount of its capital gains. If a corporation has a net capital loss, the loss cannot be deducted in the current tax year but instead must be carried to other tax years and deducted from capital gains that occur in those years. This is the case for both federal and Minnesota tax purposes.

S Corporation

S corporations may pass capital gains through directly to shareholders, although the S corporation must make the determination of when the long-term capital gain is taken into account on its own books.

CREDITS: This is an excerpt from A Guide to Starting a Business in Minnesota, provided by the Minnesota Department of Employment and Economic Development, Small Business Assistance Office, Twenty-eighth Edition, January 2010, written by Charles A. Schaffer, Madeline Harris, and Mark Simmer. Copies are available without charge from the Minnesota Department of Employment and Economic Development, Small Business Assistance Office.

This is also part of a series of articles on How to Pick the Right Business Entity Type. These articles help you select the right business type for your circumstances.

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