Who Can Claim an Ordinary Loss on Section 1244 Stock?
Only individuals who originally purchased the stock may claim an ordinary loss on Section 1244 stock rather than a capital loss.
If you received the stock by gift, inheritance, or purchased it from an original purchaser, you cannot claim an ordinary loss deduction on Section 1244 stock.
The Tax Advantage:
A capital loss has an annual deduction limit of $3,000, while up to $50,000 of the loss on Section 1244 stock may be claimed all at once by unmarried individuals as an ordinary loss. Any excess loss over $50,000 is treated as a capital loss and must comply with the rules for capital losses.
Up to $100,000 of the loss on Section 1244 stock may be claimed as an ordinary loss by married individuals filing a joint return even if only one spouse owns the stock.
If a partnership purchases Section 1244 stock of another company, and later disposes of the stock at a loss, the partnership entity may pass the loss through to its partners.
For a partner to be allowed to claim the loss as an ordinary loss instead of a capital loss, the partner must have been a partner when the stock was issued and have remained so until the time of the loss.
Caution! If the partnership entity owns Section 1244 stock and distributes the stock to its partners, they may not claim an ordinary loss on their disposition (i.e. sale) of the stock, instead, capital loss treatment applies
Although S corporations and partnerships are pass-through entities, the owners of these entities (shareholders and partners) are treated differently when it comes to deducting a loss on Section 1244 stock that is passed through the entity to its owners.
As mentioned earlier, when the partnership entity owns Section 1244 stock and passes a loss on the stock to its partners, they generally get to deduct the loss as an ordinary loss on their individual income tax returns.
However, this is not the case for S corporation shareholders. If an S corporation owns Section 1244 stock and passes a loss on the stock to its shareholders, they may not deduct the loss as an ordinary loss. Instead, they must deduct the loss as a capital loss.
This tax treatment of Section 1244 stock losses, where partners in a partnership get to deduct the loss as an ordinary loss, while S corporation shareholders must deduct the loss as a capital loss, is an important distinction between the two types of entities.
Where to Claim a Section 1244 Loss
Form 4797, Sales of Business Property, is used to report an ordinary loss on the sale of Section 1244 stock or a loss resulting from the stock becoming worthless. Attach Form 4797 to Form 1040.
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- See the Tax Basics for Startups table of contents and scroll down to the Section 1244 Stock link for more information.