Section 1244 Stock Deduction Limits

Unmarried Individuals

Up to $50,000 of the loss on Section 1244 stock may be claimed 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.

Married Individuals

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.

Any excess loss over $100,000 is treated as a capital loss and must comply with the rules for capital losses.

To be considered Section1244 stock, the stock and the corporation must comply with the following:

  • The corporation can have equity (total assets minus total liabilities) up to $1 million at the time the stock is issued.
  • The stock must be issued for cash or property not stock and securities.
  • More than half the corporation's income for the preceding five years before the loss must have come from business operations, not from passive income (rents, royalties, dividends, interest. annuities, or gains from the sale of stocks or securities).
  • If the corporation was not in existence for five years before your loss, then the years it was in existence will be considered for the gross receipts test.
  • You must acquire the stock by purchase (not by-gift, inheritance, or by purchasing the stock from someone else).
  • You must be the original purchaser of the stock.

Keep records!

Your records must show that the corporation's stock qualifies as Section 1244 stock.

For example:

  • In the corporate minutes and/or corporate by-laws, you should make reference to the issuance of Section 1244 stock.
  • Keep a record of gross receipts for the past five years or whatever length of time is applicable if less than five years
  • Show sources of income and the amounts from each source.

In the event of an audit, special tax treatment may be lost without sufficient evidence showing stock qualified for special tax treatment under Section 1244 of the Internal Revenue Code.

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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.