As a business, there are many different parts of the tax code that you need to understand in order to avoid issues. One of those is Section 1244. Section 1244 is known as the small business stock provision, and it allows shareholders of specific small businesses the ability to treat up to $50,000 of losses as ordinary losses instead of capital losses. This can incentivize investors to help small businesses because their financial risk is mitigated, but your business must meet specific requirements.
What Is Section 1244?
Section 1244 is designed to help investors in small businesses that need funding to lessen their financial risk by providing them with up to $50,000 of tax insurance. In the event that investors have any losses, they will be able to reap the benefits of faster-than-normal deductions for their losses, as long as the shares that they lost are considered 1244 stock.
What Are the Requirements for Section 1244 Stock?
The IRS has strict rules that govern what types of losses can be claimed and what classifies a stock as a 1244 stock, including:
- The stock needs to be issued by a US corporation
- The corporation cannot have over $1,000,000 in equity when the stock is issued (in some cases the cap imposed by Congress is slightly higher)
- The stock must be purchased directly from the business
- The company must have derived 50% or more of gross receipts from business operations
- The stock must be issued for property or money (not stock or services)
Because these requirements are strict, it’s important to work with your accountant and financial advisor to ensure that your company qualifies or the company you are investing in qualifies.
What Are the Benefits of Section 1244 Designation?
If your small business is able to get Section 1244 designation it’s a great thing, as it encourages investors to purchase stocks who might otherwise be unsure due to your lack of history. For investors, it also lessens the blow of investing in a company that ends up going under. If your business is able to meet the requirements, it’s a great way to entice interested people to get involved and purchase stock.
Master the Tax Filing Process with Help from MKS&H
MKS&H provides tax and accounting services to businesses of every size and in every industry. We can work with you to make taxes easily and avoid the most common mistakes. Contact us today for a consultation.
About MKS&H: McLean, Koehler, Sparks & Hammond (MKS&H) is a professional service firm with offices in Hunt Valley and Frederick. MKS&H helps owners and organizational leaders become more successful by putting complex financial data into truly meaningful context. But deeper than dollars and data, our focus is on developing an understanding of you, your culture and your business goals. This approach enables our clients to achieve their greatest potential.
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