A business asset refers to a valuable item owned by a company, including a wide range of categories like physical, tangible goods, such as vehicles and real estate, as well as intangible items. The U.S. tax code sections 1231, 1245, 1250, and capital assets primarily cover most of business assets. This article will provide a brief overview of the capital assets.

1. What is Capital Asset?
   
   The most common capital assets encompass investment properties such as stocks and bonds. While the definition of a capital asset is based on exclusion rather than inclusion, which means including any asset not explicitly excluded. Examples of properties that do not fall under the category of capital assets include, but are not limited to:
   
   

   (1)	Inventory in trade, other properties in stock or property held primarily for sale to customers.
   (2)	Depreciable or tangible assets utilized in commercial operations, including those that have been completely depreciated.
   (3)	Certain derivative financial instruments held by a dealer in relation to dealer operations.
   (4)	Certain hedging transactions that have been identified and executed as part of routine business operations.

   
   
2. How to Separate Long-Term or Short-Term Capital Gains and Losses?
   
   When a company sells a capital asset, it generally incurs a capital gain or loss. The company is obligated to differentiate its capital gains and losses according to the duration for which it held the property. Therefore, Capital gains must further be categorized as either short-term or long-term capital gains.
   
   

   (1)	The duration for short-term capital gains is one year or shorter.
   (2)	Long-term capital gains and losses generally result from holding an asset for a period of one year or more. The holding period commences on the date the property is acquired and concludes on the date of its disposition.

   
   
3. Capital Loss Carry-Forward Rules
   
   A company is only permitted to offset capital losses against capital gains up to the amount of the gains. In the event of a surplus capital loss, the company is unable to deduct the loss in the present year and is required to carry it forward for utilization in subsequent years.
   
   

   (1)

   General carry-forward rule The sequence for carrying forward capital losses to subsequent years is as follows: three years prior to the year of the loss, two years prior to that, and one year prior to that. Any remaining losses can be carried forward for up to five years. When carried forward, a loss is classified as a short-term loss. In summary, a net capital loss can be carried back for three years and carried forward for a maximum of five years.

   (2)

   Special carry-forward rule An S-corporation is not permitted to transfer a capital loss from one year to another. When carrying over a capital loss, the corporation must adhere to specific regulations and guidelines. In calculating the net capital loss for the current fiscal year, a corporation is precluded from amalgamating it with a carried-over capital loss from a previous year. The corporation is only permitted to carry forward capital losses to years in which there would otherwise be a cumulative net capital gain. When a company carries losses from multiple years to the same fiscal year, the loss from the earliest year is deducted as a priority. A corporation is not permitted to utilize a capital loss carried forward from a previous year to generate or augment a net operating loss (NOL) in the year to which the corporation carries it back.

   
   
4. How to Report Capital Gains and Losses?
   
   A company generally discloses its short- and long-term financial gains and losses on Form 8949, Sales and Dispositions of Capital Assets, and on Form 1120, Schedule D, Capital Gains and Losses.
   
   If a company experiences a net capital gain, it is advisable to first offset the gain by any carryforward loss, and subsequently utilize any net operating loss (NOL) for the current fiscal year.
   
   If a company does not have a net operating loss (NOL) in the current year, the net capital gain is aggregated with the corporation's other reported income and subject to taxation at the federal corporate flat tax rate of 21 percent.
   
   A company has the potential to apply capital losses to previous tax years and request reimbursements for periods when corporate tax rates were elevated, contingent upon the specific years in question. For instance, a corporation operating on a calendar-year basis in 2020 retains the ability to carry back a capital loss to 2017, prior to the enactment of the Tax Cuts and Jobs Act (TCJA).
   

Reference:
https://www.irs.gov/forms-pubs/about-schedule-c-form-1040
https://www.irs.gov/forms-pubs/about-form-1040
https://www.irs.gov/pub/irs-pdf/f1040sc.pdf
https://www.irs.gov/pub/irs-pdf/p587.pdf