What is Section 1244 Stock?
Section 1244 of the Internal Revenue Code is the small business stock provision enacted to allow shareholders of domestic small business corporations to deduct a loss on the disposal of such stock as an ordinary loss rather than as a capital loss, which is limited to only $3,000 annually.
Normally, stock is treated as a capital asset and if disposed of at a loss, the loss is deducted as a capital loss. The general rule for net capital losses (losses that exceed gains) is that they are subject to an annual deduction limit of only $3,000. Any excess over $3,000 must be carried over to the next year.
A loss on Section 1244 stock, on the othe hand, is deductible as an ordinary loss up to $50,000 ($100,000 on a joint return, even if only one spouse has a Section 1244 loss). A big difference!
Note that ordinary losses are noramally 100% deductible. However, while a loss on Section 1244 stock is treated as an ordinary loss, the deduction is limited to the amounts stated above.
To receive the tax benefit of Section 1244, the Code prescribes specific requirements for:
- The corporation issuing the small business stock
- The stock itself, and
- The shareholders of the corporation
Where to Claim a Section 1244 Loss
You claim a loss on section 1244 stock on Form 4797, not Schedule D..
Qualifying as Section 1244 stock:
To qualify as Section 1244 stock:
- The corporation's equity may not exceed $1,000,000 at the time the stock is issued.
- The stock must be issued for money or property (other than stock and securities).
- For the five years preceding the loss, the corporation 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 exchange of stock or securities.