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3.3.1: 1244 Stock
Contributing Editor: Mary Beth Kerrigan of Morse, Barnes-Brown & Pendleton, P.C.
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Abstract
Section 1244 of the Internal Revenue Code, which allows stockholders to deduct losses from the sale of stock in "small business corporations" as ordinary (versus capital) losses, is self-executing (i.e. no advance election is required). Indeed, §1244 losses are not losses from a "passive activity" and, therefore, can be offset against active income (e.g., wages) and portfolio income.[1] Generally, §1244 applies to common (or preferred) stock acquired in an early round (the first $1 million in financing) by an individual or a partnership directly from the issuer (including an S Corporation) for cash or property.[2] The maximum amount that can be claimed as an ordinary loss (versus a capital loss) each year is $50,000, or $ 100,000 in the case of a husband and wife filing jointly.[3] The most interesting issue for planners of a start-up corporation (an often overlooked question because of the amounts involved) is who...
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