30.13 Ordinary Loss for Small Business Stock (Section 1244)

Shareholders of qualifying “small” corporations may claim within limits an ordinary loss, rather than a capital loss, on the sale or worthlessness of Section 1244 stock. An ordinary loss up to $50,000, or $100,000 on a joint return, may be claimed on Form 4797. On a joint return, the $100,000 limit applies even if only one spouse has a Section 1244 loss. Losses in excess of these limits are deductible as capital losses. Any gains on Section 1244 stock are reported as capital gain on Schedule D.

An ordinary loss may be claimed only by the original owner of the stock. If a partnership sells Section 1244 stock at a loss, an ordinary loss deduction may be claimed by individuals who were partners when the stock was issued. If a partnership distributes the Section 1244 stock to the partners, the partners may not claim an ordinary loss on their disposition of the stock.

- - - - - - - - - -
image Planning Reminder
Record-Keeping for Section 1244 Stock
You must keep records that distinguish between Section 1244 stock and other stock interests. Your records must show that the corporation qualified as a small business corporation when the stock was issued, you are the original holder of the Section 1244 stock, and it was issued for money or property. Stock issued for services does not qualify. In addition, the records should also show the amount paid for the stock, information relating to any property transferred for the stock, any tax-free stock dividends issued on the stock, and the corporation’s gross receipts data for the most recent five-year period.
Failure to keep these records will be grounds for disallowing a loss that is claimed on Section 1244 stock.
- - - - - - - - - -

If an S corporation sells Section 1244 stock at a loss, S corporation shareholders may not claim an ordinary loss deduction. The IRS with Tax Court approval limits shareholders’ deductions to capital losses (which are deductible only against capital gains plus $3,000 ($1,500 if married filing separately) (5.4).

To qualify as Section 1244 stock:

1. The corporation’s equity may not exceed $1,000,000 at the time the stock is issued, including amounts received for the stock to be issued. Thus, if the corporation already has $600,000 equity from stock previously issued, it may not issue more than $400,000 worth of additional stock.
If the $1,000,000 equity limit is exceeded, the corporation follows an IRS procedure for designating which shares qualify as Section 1244 stock.
Preferred stock issued after July 18, 1984, may qualify for Section 1244 loss treatment, as well as common stock.
2. The stock must be issued for money or property (other than stock and securities).
3. The corporation for the five years preceding your loss must generally have derived more than half of its gross receipts from business operations and not from passive income such as rents, royalties, dividends, interest, annuities, or gains from the sales or exchanges of stock or securities. The five-year requirement is waived if the corporation’s deductions (other than for dividends received or net operating losses) exceed gross income. If the corporation has not been in existence for the five years before your loss, then generally the period for which the corporation has been in existence is examined for the gross receipts test.
..................Content has been hidden....................

You can't read the all page of ebook, please click here login for view all page.
Reset
18.220.6.85