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November 09, 2017 | Posted in:

Stock Investments: Making the Most of Your Losses

Do you invest in stocks? Ever sell a stock and come to realize you lost money on your investment? If you answered yes, than you incurred what the tax code refers to as a capital loss.

Do you realize that current tax law limits how much you can deduct as a capital loss? The limit is $3,000. So if you have a net capital loss greater than $3,000 you won’t be able to deduct the full amount on your tax return. Fortunately, there are some instances where you can benefit from current tax law. Section 1244 stock is one of those instances.

What is Section 1244?

Generally speaking, when stock becomes worthless it is deducted as a capital loss. As stated earlier, there is an overall limit of $3,000 that can be deducted on an individual’s tax return. Section 1244 states that certain qualifying stock that becomes worthless can be deducted as an ordinary loss. There is a limit of $50,000 of ordinary loss for a single taxpayer. Married taxpayers filing a joint income tax return can deduct up to $100,000 if there is a Section 1244 loss. In order to qualify for this type of treatment, the stock must belong to a qualifying small business corporation.

What qualifies as Section 1244 stock?

A company qualifies as a small business corporation if the total amount of money or other property received by the corporation for stock doesn’t exceed $1 million. Also, the stock must be issued in exchange for money or other property. Finally, for the five years preceding the loss, the corporation must have earned more than half of its income from business operations rather than passive income such as rents, royalties, dividends, or interest. If all of these conditions are met, then the stock will qualify as Section 1244 stock and a single taxpayer will be able to treat up to $50,000 of loss as ordinary loss. Again, married taxpayers filing a joint tax return would be able to treat up to $100,000 of loss as ordinary loss. That’s a huge tax break.

How much of a benefit is it?

Let’s take a look at a quick example. Let’s assume than John and Jane Doe are married and file a joint income tax return. They have stock in ABC Corp. that has become worthless this year. Their investment was $75,000. How would Section 1244 impact their tax bill for the year?

Nonqualifying Stock

Qualifying Sec. 1244 Stock

Wages

$100,000

$100,000

Interest and Dividends

3,000

3,000

ABC Corp. Investment Loss

(3,000)

0

ABC Corp. Ordinary Loss (Sec. 1244)

0

(75,000)

Standard Deduction and Exemptions

(20,700)

(20,700)

Taxable Income

79,300

7,300

Tax

$11,368

$730

 

Take Away

In summary, Section 1244 is one heck of a tax break. If the stock you’ve invested in qualifies, then you could potentially treat up to $100,000 as ordinary losses, which will create tax savings for the taxpayer.

If you are interested in learning more about this tax break, or are curious if any of your investments qualify as Section 1244 stock, please give us a call today.
 

Author:

Associate Partner
 
Ren III provides tax, accounting, and advisory services to a broad range of clients, with a specialty for manufacturers, title insurance companies, and professional service providers.
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JB Financial Associates is now Alloy Silverstein.
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