What Is Section 1244 Stock?

Section 1244 stock refers to a special tax treatment available for shares of stock issued by small, domestic corporations. Under Section 1244 of the Internal Revenue Code, losses from the sale of these shares can be deducted as ordinary losses rather than 澳洲幸运5官方开奖结果体彩网:capital losses. This tax benefit is available up to a maximum of $50,000 for individual tax returns or $100,000 for 澳洲幸运5官方开奖结果体彩网:joint returns.

Understanding Section 1244 Stock

Startups and small businesses are risky endeavors. Section 1244 provides an important benefit by allowing certain capital losses to be treated as ordinary losses. 澳洲幸运5官方开奖结果体彩网:Ordinary losses are fully deductible in the year of the loss rather than being subject to an💖 annual limit.

Moreover, ordinary losses are not offset by capital gains. This means that firms can still enjoy the lower tax rate associated with capital gains which may have otherwise been netted out against a capital loss. At the same time, 澳洲幸运5官方开奖结果体彩网:ordinary taxable income can be netted by ordinary 🌠losses, which rꦅeduces taxable income.

Any loss that qualifies as an ordinary loss under Section 1244 is also classified as a trade or business loss in computing an individual’s 澳洲幸运5官方开奖结果体彩网:net operating loss (NOL). Therefore, Section 1244 losses are allowed for NOL purpoౠses without being limited by non-business income.

Qualifying for Section 1244 Stock

To qualify for Section 1244 tax treatment, both the corporation, the stock, and the 澳洲幸运5官方开奖结果体彩网:shareholders must meet specific requirements:

Corporation

• The stock must be issued by a U.S. 澳洲幸运5官方开奖结果体彩网:corporation.
• The corporation’s aggregate capital cannot exceed $1 million at the time of stock issuance.
• The corporation must generate more than 50% of its income from active business operations (i.e., income cannot primarily come from passive investments like interest, dividends, or royalties). It must run as an 澳洲幸运5官方开奖结果体彩网:operating company.

Stock

• The stock can be either common or preferred, but if issued before July 19, 1984, only common stock qualifies for Section 1244 treatment.
• Shares must be held continuously since issuance and not exchanged through the market or private transactions.

Shareholder

• Only individual shareholders who directly purchase the stock from the corporation qualify for the special tax treatment.
• Stock received as compensation does not qualify.

Exclusions to Section 1244

Section 1244 does not apply to any contributions made after the initial shares are issued. However, later contr🧸ibutions can qualify if the investor receives shares that were authorized, but not issued.

Section 1244 stock should be issued pursuant to a written corporate resolution. A loss can be claimed by individual shareholders as a Section 1244 stock loss on , and must be filed with the shareholder's individual income tax return.

The Bottom Line

Section 1244 provides a valuable tax benefit for investors in small businesses and startups. By allowing certain capital losses to be treated as ordinary losses, it helps these businesses offset losses more effectively and reduce their 澳洲幸运5官方开奖结果体彩网:taxable income.

To qualify for Section 1244 treatment, bo✃th the corporation, the stock, and the shareholders must meet specific requirements. Understanding these rules and making sure the st🌼ock qualifies can provide significant tax advantages.