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How Does Code Section 1244 Affect Stock Sales And How Can You Take Advantage Of It?
Article Highlights:
Section 1244
Ordinary Loss Versus Capital Loss
Sec 1202 Gain Exclusion
Small Business Corporation
Written Corporate Resolution
Documentation
Starting a small business can be a risky undertaking and Internal Revenue Code Section 1244 provides special tax treatment to the disposition of certain qualifying stock of small businesses. It essentially allows losses up to $50,000 ($100,000 for married taxpayers filing jointly) to be subject to the more favorable ordinary loss treatment, all deductible in the year of the loss rather than being treated as a capital loss limited to a per year loss of $3,000 ($1,500 for married taxpayers filing separate). In addition, 1244 stock losses are allowed for NOL purposes without being limited by non-business income.
Congress originally created this benefit to encourage investment in small business enterprises. It may also be a factor in determining choice of entity when originally initiating a business. In addition to the benefits provided by Sec 1244, another part of the Internal Revenue Code, Sec 1202, allows gain from C corporation stock to be excluded from income where the aggregate gross assets of the corporation immediately after the issuance (determined by considering amounts received in the issuance) does not exceed $50 Million, the corporation meets an active business requirement, and the stock is held more than 5 years. The maximum excludable gain under Sec 1202 can’t exceed $10 million ($5 million, if married separate). For additional information related to the Sec 1202 gain exclusion give this office a call.
1244 Stock - In general the term 1244 stock means stock in a domestic corporation if at the time such stock is issued:
Such corporation was a small business corporation,
The stock was issued by a small business corporation for money or other property (other than stock and securities), and
During the corporation’s 5 most recent taxable years ending before the date of the stock loss, derived more than 50% of its aggregate gross receipts from sources other than royalties, rents, dividends, interests, annuities, and sales or exchanges of stocks or securities.
Small Business Corporation Defined - A corporation is treated as a small business corporation if the aggregate amount of money and other property received by the corporation for stock, as a contribution to capital, and as paid-in surplus, does not exceed $1,000,000. The determination under the preceding sentence is made as of the time of the issuance of the stock in question but also includes amounts received for such stock and for all stock previously issued.
The losses are reported by the individual stockholder; however, individual stockholders do not include trusts or estates.
Section 1244 does not apply to any contributions made after the initial shares are issued unless the shares were authorized, but not issued. Section 1244 stock should be issued pursuant to a written corporate resolution.
Taxpayers taking advantage of the Section 1244 stock rules should document the factors that allow them to qualify. This could include corporate minutes and resolutions, accounting and bank records, and even operational records.
If you need additional information related to 1244 stock, please give this office a call.
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Offices in Flemington, NJ and Califon, NJ
Our Mission: At Prestige Accounting Services Group (previously Prestige Wealth Accounting Group), we are on a mission to redefine the tax experience for individuals and small businesses. With a focus on personalized service, strategic planning, and expert guidance, we aim to empower our clients to succeed financially with confidence and ease.
Expertise in Action: With a wealth of experience and a team of dedicated professionals, we specialize in individual and small business tax preparation. While we excel in all areas of taxation, our passion lies in serving the unique needs of small business owners in New Jersey. We understand that small business taxation requires specialized knowledge and attention to detail, which is why we go above and beyond to ensure our clients receive the guidance and support they deserve.
Tailored Solutions for Every Client: Whether you're a high-net-worth individual seeking comprehensive tax planning or a small business owner in need of accounting and bookkeeping assistance, we have the expertise to meet your needs. Our team takes the time to understand your specific situation and develop customized solutions that align with your goals and objectives.
Why Choose Us?: What sets us apart from other New Jersey tax firms is our commitment to excellence and innovation in the field of taxation. We don't just prepare tax returns; we provide strategic insights, proactive planning, and actionable advice to help our clients achieve their financial goals. With a team of two CPAs, an EA, and an ERO, we have the expertise and resources to deliver exceptional service and results.
Your Success is Our Priority: At Prestige Accounting Services Group (previously Prestige Wealth Accounting Group), we measure our success by the success of our clients. We are dedicated to building long-lasting relationships, providing unparalleled service, and helping our clients thrive in today's ever-changing tax landscape.
We can't wait for you to experience the Prestige Accounting Services Group (previously Prestige Wealth Accounting Group) difference.
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