Deducting a Loss on Small Business Stock (Section 1244)
IRC Section 1244 deals with the tax treatment of losses on small business stock issued by a corporation. Only individuals may claim an ordinary loss deduction on Section 1244 stock.
If you own stock in a qualifying small corporation and the business fails, causing its stock to become worthless, you may claim an ordinary loss, up to certain limits, against your other sources of income.
You must be the original purchaser of the stock to qualify for ordinary loss treatment.
The Section 1244 Stock Tax Benefit
The tax benefit of Section 1244 stock is the ability to deduct a loss on such stock as an ordinary loss rather than as a capital loss. An ordinary loss if fully deductible in the year of the loss, while a capital loss has an annual deduction limit of $3,000 and any excess over $3,000 must be carried forward by individuals to the following tax year.
Different rules for deducting capital losses apply to regular C corporations, which may carry a capital loss back three years and forward five years.
- See the Tax Basics for Startups table of contents and scroll down to the Section 1244 Stock link for more information.