J.K. Lasser's Small Business Taxes 2013: Your Complete Guide to a Better Bottom Line

Tax Treatment of Capital Gains and Losses for Pass-Through Entities

Capital gains and losses are separately stated items that pass through separately to owners. They are not taken into account in figuring the entity’s total income (or loss). The reason for this distinction is to allow individual owners to apply the capital gain and loss rules on individual tax returns.

The impact of pass-through treatment of capital gains and losses is that owners may have favorable capital gains rates applied to their share of the business’s capital gains. Similarly, they may offset pass-through gains and losses from their business against their personal gains and losses.

Example

In 2012, a shareholder in an S corporation has pass-through capital loss from his corporation of $10,000. He also has a $10,000 capital gain distribution from a mutual fund he owns in his personal investment account. He can offset the business loss by his personal gain on his individual income tax return.

Tax Rates on Capital Gains

Owners who are individuals pay tax on their share of capital gains as they would on their gains from personal investments. Thus, long-term capital gains generally are subject to a basic capital gains rate of 15%. However, owners in the 10% and 15% tax brackets pay no tax on their share of capital gains. These rates apply to sales and exchanges in 2012 as well as to payments received in 2012 on installment sales made in prior years.

SHORT-TERM GAIN

This type of gain is subject to the ...