Discussion 1,2,3 and 4

Running Head: CAPITAL GAINS AND TAXATION 1

CAPITAL GAINS AND TAXATION 5

CAPITAL GAINS AND TAXATION

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Capital gains occur when a business entity sells its stock or assets at a higher price than the one used to purchase it. It’s the additional amount when an asset is sold. An asset may include factors such as real estate, equipment and also security investments. Mostly, a tax on the capital gain is often imposed when the sale of an asset brings profit. A lot of investors use different methods to acquire either the capital gain or the capital loss in relation to their needs (Llp, 2011).

Planning opportunities that would be beneficial in a corporate and independent business setting are the stock options and stock grants and the business owner’s personal tax respectively. Providing stock options to personnel, both the executive and the rest of the staff provides an organization with an advantage when it comes to competition. The stock options attract employees such that a company maintains its highly skilled manpower resulting to the advantage.

When considering their planning opportunities, the corporate world should take into consideration their stock options and stock grants. Stock Options are of two kinds; one is the incentive stock option (ISO) and the second is the Non-Qualified stock options. Incentive stock options usually offer a preferential tax treatment. It also follows guidelines that are set by the Internal Revenue Servie (IRS). With this stock option, employees will not pay their taxes on stock until when they are able to sell their shares (Llp, 2011). After the sale of shares, capital gains (both long and short-term) will be paid on a basis of what has been earned. The tax rate used in this case is lower than the usual income tax rate. Short-term capital gains will be taxed as traditional income tax rate; 28% to 39.6%. However, for long-term capital gains the tax rate that is used is 20%. It’s applicable if one has held the shares for the past one year after the exercise and two years following grant (Llp, 2011).

With non-qualified stock options, one has to report the price break so that it can be taxed as compensation, and in the year in which the options have been exercised. It is therefore best that corporates take into consideration their stock options and grants when planning so as to pay minimal tax on their gains.

Independent business units should consider the business owner’s personal tax in their planning opportunities. The 3.8% medicate surtax is a factor in all capital gains. It is a surtax and will be used regardless of the rate use. However, if business owners plan well, they can avoid or pay less. This option should be considered by business owners because it affects other family members who may not be actively involved in the daily operations of the business, but get passive income (Bakker & Kloosterhof, 2010).

If the business owner plans well, then this taxation shouldn’t be a worry. Timing the income is a sure way of avoiding the tax since if the Net Investment Income is low, then the tax will also be low. The individual, therefore, has to choose the best time to make investment sales (Parish, 2014).

Capital gains have merits and demerits in relation to the situation of the taxpayer or investor. An advantage of the taxes imposed on capital gains is that the tax payments are held off until the sale of an asset. This is an advantage over the income tax that has to be paid whenever the income payment is done. An example is when an investor in real estate not paying taxes on the equity obtained on an investment until the time the property will be sold for a profit. Also, a tax rate that is long-term is more advantageous than a short-term. If an investor was in possession of an asset for more than a year and discovers profit, then the investor obtains a long-term profit. The long-term profit is taxed at a minimum rate. However, if the investor was in possession of an asset for less than a year and sells it at a profitable price, then the investor obtains a short-term profit. The short-term profit is taxed at a maximum rate. On the other hand, a disadvantage of the capital gain tax is the reduction in profits. The internal revenue service views anything that an individual uses for personal gain or investment as a capital asset. The internal revenue service demands a report on the profits made on the sale of capital assets which is a disadvantage. This implies that the tax charged would result in a decrease in the profits obtained (Bakker & Kloosterhof, 2010).

References

Bakker, A., & Kloosterhof, S. (2010). Tax risk management. Amsterdam, The Netherlands: IBFD.

Llp, H. (2011). Tax Aspects of the Purchase and Sale of a Private Company's Shares. A&C Black.

Parish, S. (2014). Zero To 60: What Business Owners Need To Know About Capital Gains. Forbes.com. Retrieved 24 September 2015, from http://www.forbes.com/sites/steveparrish/2014/03/24/zero-to-60-what-business-owners-need-to-know-about-capital-gains/