Action 1244 allows individuals to write off up to $50,000 as ordinary loss when filing a personal tax capital loss with the IRS. There are strict requirements for a stock to qualify as a section 1244 stock, and detailed documentation must be maintained.
Action 1244 is a classification of investments used when filing a personal tax capital loss with the IRS. There is generally a $3,000 United States Dollar (USD) limit on losses that can be counted against personal income. With a 1244 action, individuals can write off up to $50,000 USD as ordinary loss.
For example, an individual shareholder Bob invests $100,000 in shares of Corporation A. Corporation A has a rough year and its shares drop dramatically, so Bob sells his shares for $40,000, creating a loss of $60,000. . His additional investments are doing well, so he has $10,000 in capital gains from other investment sources. Typically, he could claim capital losses of $10,000 against his capital gains and an additional $3,000 of ordinary loss against his other regular W2 income. If the stock in Corporation A qualifies for 1244 status, he can now claim not only the $10,000 capital loss against his capital gains, but the additional $50,000 in ordinary losses against his regular W2 income.
There are some strict requirements that must be met for a stock to qualify as a section 1244 stock. The business must be a small corporation, which means gross receipts, including stock sales, must not be more than $1,000,000. . It must also have become a corporation after November 6, 1978. During the past five years, the corporation must have received more than 50% of its income from sources outside of its trading-related activities, such as royalties, dividends, interest , annuities and securities sales.
A 1244 stock loss can only be claimed by an individual or partnership, not by another corporation or estate. Must have been purchased in the original public offering. The shares themselves must be common or preferred shares that were purchased for cash or property, not in exchange for other shares or services.
The stock is reported in IRS section 1244 of form 4797 Part II. The shareholder claiming the loss must maintain records that separate the Section 1244 shares from his or her other shares. The IRS requires them to keep detailed documentation. Records must include information showing that the corporation qualifies as a small business corporation and that they were the original holders of the shares, the amount the shares were purchased for, and proof that it was an exchange of cash or property, any information on transfers of ownership for the shares or dividends issued, as well as the company’s receipt data for the last five years. In the case of an audit, these documents are necessary to prove the shareholder’s claim that the investment was a 1244 share.
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