Frequently Asked Questions
Who is eligible for the Section 1244 Ordinary Loss Deduction?
Stock must be in a domestic 'small business corporation' (capitalization <$1M) issued for money or property. The corporation must meet a gross receipts test (active business) for the 5 years preceding the loss.
How does the Section 1244 Ordinary Loss Deduction work?
Allows individuals to treat losses from the sale or worthlessness of small business stock as ordinary losses rather than capital losses, up to $50,000 (or $100,000 for joint returns) per year.
What law authorizes the Section 1244 Ordinary Loss Deduction?
The Section 1244 Ordinary Loss Deduction is authorized under IRC §1244 of the Internal Revenue Code (Title 26, United States Code).
Statutory Text — IRC §1244
Source: Internal Revenue Code, Title 26, United States Code
§ 1244. Losses on small business stock(a) General ruleIn the case of an individual, a loss on section 1244 stock issued to such individual or to a partnership which would (but for this section) be treated as a loss from the sale or exchange of a capital asset shall, to the extent provided in this section, be treated as an ordinary loss.
(b) Maximum amount for any taxable yearFor any taxable year the aggregate amount treated by the taxpayer by reason of this section as an ordinary loss shall not exceed—(1) $50,000, or
(2) $100,000, in the case of a husband and wife filing a joint return for such year under section 6013.
(c) Section 1244 stock defined(1) In generalFor purposes of this section, the term “section 1244 stock” means stock in a domestic corporation if—(A) at the time such stock is issued, such corporation was a small business corporation,
(B) such stock was issued by such corporation for money or other property (other than stock and securities), and
(C) such corporation, during the period of its 5 most recent taxable years ending before the date the loss on such stock was sustained, derived more than 50 percent of its aggregate gross receipts from sources other than royalties, rents, dividends, interests, annuities, and sales or exchanges of stocks or securities.
(2) Rules for application of paragraph (1)(C)(A) Period taken into account with respect to new corporationsFor purposes of paragraph (1)(C), if the corporation has not been in existence for 5 taxable years ending before the date the loss on the stock was sustained, there shall be substituted for such 5-year period—(i) the period of the corporation’s taxable years ending before such date, or
(ii) if the corporation has not been in existence for 1 taxable year ending before such date, the period such corporation has been in existence before such date.
(B) Gross receipts from sales of securitiesFor purposes of paragraph (1)(C), gross receipts from the sales or exchanges of stock or securities shall be taken into account only to the extent of gains therefrom.
(C) Nonapplication where deductions exceed gross incomeParagraph (1)(C) shall not apply with respect to any corporation if, for the period taken into account for purposes of paragraph (1)(C), the amount of the deductions allowed by this chapter (other than by sections 172, 243, and 245) exceeds the amount of gross income.
(3) Small business corporation defined(A) In generalFor purposes of this section, a corporation shall be treated as a small business corporation if the aggregate amount of money and other property received by the corporation for stock, as a contribution to capital, and as paid-in surplus, does not exceed $1,000,000. The determination under the preceding sentence shall be made as of the time of the issuance of the stock in question but shall include amounts received for such stock and for all stock theretofore issued.
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