Per Diem Rates from the U.S. General Services Administration
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Rates are set by fiscal year, effective October 1 each year. Find current rates in the continental United States ("CONUS Rates").
Capital Losses vs Ordinary Losses
Capital losses and ordinary losses receive different tax treatment.
Capital Losses
Annual Deduction Limit and Carryover Rules for Individuals:
A capital loss results when you sell a capital asset, such as stocks and bonds, for less than your basis (generally your original cost).
A net capital loss is subject to an annual deduction limit of $3,000, which may be deducted against other sources of income reported on Form 1040, such as wages, interest, dividend, etc.
After completing the netting process at the end of a tax year (subtracting total capital losses from total capital gains, if any), if total capital losses exceed total capital gains, the result is a net capital loss.
$3,000 Annual Capital Loss Deduction Limitation:
If a net capital loss exceeds the $3,000 annual deduction limit, the excess loss must be carried over to the following year and included in the computation of net capital gains and losses of that year.
Capital Loss Carry Forward Rule for Individuals:
Individuals may carry forward a capital loss to future years indefinitely until used up. Individuals may not carry back any part of a net capital loss to a prior year (this rule differs for C corporations, which may carry back and carry forward capital losses).
Character of Capital Gains and Losses in Carryforward Year(s):
For individuals, the character (identity) of a capital gain and capital loss remains the same in a carryover year (i.e. a short-term capital loss or capital gain remains a short-term capital loss or capital gain; a long-term capital loss or capital gain remains a long-term capital loss or capital gain (this rule differs from C corporations, where capital losses carried to another year are treated as short-term even if the loss was originally a long-term capital loss. Its original identity is not retained).
Ordinary Losses
An ordinary loss occurs from the normal operations of a business when expenses exceed income. A loss from business operations should not be offset against capital gains.
An ordinary loss can also occur as a result of a net section 1231 loss, which involves a loss from the sale of depreciable business property held over one year at the time of sale.
Advantage of Ordinary Loss over Capital Loss:
An ordinary loss is fully (100%) deductible in the year it occurs; it is not subject to the the annual $3,000 loss deduction limitation that applies to capital losses.
Are you in a trade or business?
This is important to understand because the financial consequences of deducting an ordinary loss which is deemed to be a capital loss by the IRS and/or the court, can be substantial.
The U.S. Tax Court said the following (Matz v. Commissioner, Tax Ct. Dkt. No. 17820-95) regarding capital losses vs ordinary losses:
"To be engaged in a trade or business, an individual must be involved in an activity with continuity and regularity, and the primary purpose for engaging in the activity must be for income or profit. A sporadic activity, a hobby, or an amusement diversion does not qualify."
In one of its decisions, the court held:
"After concessions, the issues for decision are: (1) Whether for 1985 a $325,000 loss petitioners sustained relating to Southern Express, a failed startup airline, is ordinary or capital. This turns on whether petitioner was engaged in a trade or business. We hold petitioner was not engaged in a trade or business, and that the loss is a capital loss."
Matz v. Commissioner, Tax Ct. Dkt. No. 17820-95
C corporations:
C corporation capital losses may not be deducted from operating income. Capital losses may only be offset against capital gains. Therefore, a C corporation deducts capital losses up to the amount of its capital gains in any given tax year.
While corporations do not receive preferential tax treatment for capital gains, corporations are nevertheless required to classify capital gains as short-term or long-term.
If a C corporation's capital loss exceeds its capital gains in any year, the excess loss is carried back in a specific order and then carried forward up to 5 years.
A C corporation's net capital loss that is carried to another year is treated as a short-term loss even if it originally was a long-term loss (this is in contrast to the rule for individuals, where capital losses retain their original character as short-term or long-term when carried over to a another year).
Capital Loss Ordering Rule For C corporations:
C corporations must follow a specific order when carrying capital losses back and forward. C corporations may carry a net capital loss back three years and forward up to a maximum of five years. If part of a capital loss remains after carrying it forward up to five years, it is lost forever.
A C corporation's excess capital loss in any given year is carried to other years in the following order:
- First, 3 years prior to the loss year
- Next, 2 years prior to the loss year
- Then, 1 year prior to the loss year
- Finally, any loss remaining is carried forward for 5 years
A C corporation's net capital loss can be carried back only to the extent it does not increase or produce a net operating loss (NOL) in the tax year to which it is carried. For special rules for capital loss carrybacks, see section 1212(a)(3).
C corporations may use Form 1139, Corporation Application for Tentative Refund Corporations to carry back a net capital loss, net operating loss, unused general business credit, or an overpayment of tax from a claim of right adjustment.
Form 1139 is not applicable to S corporations, which are pass-through entities (shareholders file their share of income and losses on their personal income tax returns).
Section 1231 Transactions
Section 1231 is the section of the Internal Revenue Code that governs the tax treatment of gains and losses on the sale or exchange of real or depreciable property used in a trade or business and held over one year.
Form 4797 is used to report the sale of business property. Section 1231 losses are 100% deductible as ordinary losses and section 1231 gains are taxed as long-term capital gains at the lower capital gains rates.