Section 1244 Stock

What Is a Section 1244 Stock?

Section 1244 stock refers to the tax treatment of restricted stock by the IRS. Section 1244 of the tax code allows losses from the sale of shares of small, domestic corporations to be deducted as ordinary losses instead of as capital losses up to a maximum of $50,000 for individual tax returns or $100,000 for joint returns.

The Basics of Section 1244 Stock

Startups and small businesses are risky endeavors. Section 1244 provides an important benefit by allowing certain capital losses to be treated as ordinary losses. Ordinary losses are fully deductible in the year of the loss rather than being subject to an annual limit.

Moreover, ordinary losses are not offset by capital gains. This means that firms can still enjoy the lower tax rate associated with capital gains which may have otherwise been netted out against a capital loss. At the same time, ordinary taxable income can be netted by ordinary losses, which reduces taxable income.

Any loss that qualifies as an ordinary loss under Section 1244 is also classified as a trade or business loss in computing an individual’s net operating loss (NOL). Therefore, Section 1244 losses are allowed for NOL purposes without being limited by non-business income.

Qualifying for Section 1244 Stock

To qualify for section 1244 treatment, the corporation, the stock, and the shareholders must meet certain requirements:

Exclusion of Section 1244

Section 1244 does not apply to any contributions made after the initial shares are issued. However, later contributions can qualify if the investor receives shares that were authorized, but not issued. Section 1244 stock should be issued pursuant to a written corporate resolution. A loss can be claimed by individual shareholders as a Section 1244 stock loss on Form 4797, Sales of Business Property, and must be filed with the shareholder's individual income tax return.