 Hello, and welcome to this session in which we will discuss capital gains and losses for corporations. And I emphasize the word corporations because we do have to know capital gains and losses for individuals. So before we discuss the rules for corporations, I would like to review the rules for individuals. How do we treat? How do we handle capital gains and capital losses when it comes to individuals? Because here's what's going to happen on the CPA exam, as well as the enrolled agents exam. What's going to happen is they'll try to confuse you. How do you treat capital gains for corporations versus how you treat capital gains for individuals? Because there are differences, they will try to make you think, is this rule for a corporation or is this rule applies to individuals? So that's why the first thing I'm going to do is review the rules for individuals, then discuss corporations. Before we proceed any further, I have a public announcement about my company, farhatlectures.com. Farhat accounting lectures is a supplemental educational tool that's going to help you with your CPA exam preparation as well as your accounting courses. My CPA material is aligned with your CPA review course such as Becker, Roger, Wiley, Gleam, Miles. My accounting courses are aligned with your accounting courses broken down by chapter and topics. My resources consist of lectures, multiple choice questions, true-false questions as well as exercises. Go ahead, start your free trial today. Let's go ahead and get started. Let's assume we have net capital gains for individuals. So after we did the netting process, it means netting capital gains with capital losses, we end up with gains. That's good. How do we treat those gains? Well, remember, once we net them out, we could end up with net short-term capital gains, which is gains from capital asset that we held less than a year. Well, those are subject to your regular tax rate. Which is what? Your regular tax rate could range from 10 percent up to 37 percent and many brackets in between. And those brackets could change from year to year, but those are the typical tax brackets that are an effect today. If you have long-term capital gains, long-term means you held those assets for more than a year, they are subject to a preferential tax treatment, which is it could be either 0 percent taxed at 0 percent, 15 or 20 percent. Now, when are they taxed at zero? When are they taxed at 15? When are they taxed at 20 percent? Well, you have to go back and review the capital gains and capital losses for individual rules. This is just a review. Well, guess what? You could also end up with, rather than a gain, you could net the process and you could end up with net capital losses. What do we do with net capital losses? Well, net capital losses, you can use up to 3,000 of those losses against any income. So simply put, on your tax return, you can deduct up to 3,000 against any sort of income. So what happened if you have more than 3,000? Well, anything more, any remaining losses, they can be carried over, carried forward to future years. Now, the carry-over losses retain their classification as either whatever their long-term or short-term and they don't lose their identity. Now, this is about individuals. Let's move to corporations. Let's start with gains. Capital gains for corporations, it means you have a gain, you have more gains than losses, are not giving any preferential tax treatment. They are not treated differently. They are subject to the normal corporate tax rate and their entirety. We don't have short-term capital gains for corporation and long-term capital gains, because we don't have any special treatment. For individuals, the reason we differentiate between short-term and long-term, because they are treated differently. Short-term are taxed at the ordinary rate. Long-term are taxed at a preferential treatment. For corporation, we only have the regular rate. We always have one rate, which is the corporate tax rate. So we don't care whether the corporation has a capital gain or regular revenue, as far as the corporation is concerned, they are the same. Also, for corporation, you cannot deduct losses. You cannot deduct losses. Well, you can deduct losses against capital gains, but if you have excess losses, you cannot take those access losses. Just you cannot take them. So what do you do with them? They can only offset capital gains. So if you have any capital losses, you can carry over. You can carry over, but you cannot deduct them in that particular year. So any unused capital losses, here's what you can do with them. You can carry them back three years. So you can go back and say, you know, I'm going to take them back three years and offset some capital gains from the past three years, applying to the earliest year first. And if you don't have any capital gains in the past three years, that's fine. You can carry them forward five years. Guess what? You keep them and you carry them forward five years. All carried over losses are treated a short term. Again, that does not matter. There is no special treatment, whether it's short term or long term, but FYI just know this. The best way to illustrate this is to look at an illustration example. In the calendar year 20x3, Adam experiences a net long term capital loss amounting to 8,500. So Adam is an individual, not am, Adam. What can Adam do with this with this losses? Well, let's assume Adam has sufficient taxable income. It means more than 8,500. Let's assume they have taxable income of 100,000 or whatever their amount is, but at least 3,000. Well, Adam can deduct of the 8,500 of capital losses. Adam can use up 3,000 of those losses against ordinary income, against W2 wages, against any income, against ordinary income, wages, self-employment, whatever income that's active income, you can deduct against this. Well, guess what? If you deduct 3,000, you are left with 5,500. What can you do with this 5,500? You can take this 5,500 and carry it over to the year 20x4 and subsequent years until it's fully utilized. So you could just carry it forward. You have losses of 5,500. And these losses would retain their classification as long term capital losses, because when you do the netting process, there is a netting process and you have to do it properly. That's why they retain their classification. Now let's assume Adam was a corporation. What can Adam do with this 8,500 of capital losses assuming Adam operates as a corporation? Well, for the year 20x3, nada, they're not applicable. There's nothing you can do. Is that it? That's it? Well, no. Adam can look back to the previous three years and see if there's any capital gains, take those losses and offset capital gains. So they can go back to 20x0, 20x1, 20x3 in this order. If there's any gains, go ahead, file a tax return and amend a tax return, use the losses to wipe out the gain and get a refund. Same thing for x1, same thing for x2. Well, assuming you don't have any capital gains for x0, x1 and x2, the prior three years, well, you will take the 8,500 and you carry it forward for the next five years. Now, the best way to do this is to illustrate this concept in an example. I will work in example like a quasi-CPA example in the next session, but what should you do now? Go to Farhat Lectures and look at additional resources, lectures, multiple choice, true, false, notes. That's going to help you do what? Understand how corporations handle capital gains and capital losses. Good luck. Study hard. This concept is important, whether you are a CPA candidate, enrolled agent or an accounting student. Capital gains and capital losses because we have different rules for individuals versus corporation, so it's a room for the test takers to do what? To test your knowledge. Good luck and stay safe.