Section 1244 Stock

Last Updated on March 28, 2023

What is Section 1244 Stock?

Section 1244 of the United States Internal Revenue Code governs specific special rules applicable to the treatment of particular stock issued by a corporation. Section 1244 stock behaves as debt for federal income tax purposes. Therefore, any gain or loss on the sale or other disposition of section 1244 stock acts as ordinary income or loss rather than capital gain or loss.

Ordinary losses in section 1244 stock are those treated as ordinary income or loss rather than capital gain or loss. That way, all losses from dispositions of section 1244 stock will be deducted from your ordinary income. This is one of the benefits of section 1244 since ordinary losses are deductible in the year of the loss rather than forced to an annual limit.

1244 for Startups and Small Businesses

Section 1244 stock can be advantageous for startups and small businesses because it allows them to deduct any losses from dispositions of the stock from their ordinary income. This can help reduce the amount of taxable income they have and can help them to reduce their overall tax liability.

For example, if a startup has $50,000 in taxable income and incurs a $10,000 loss on selling section 1244 stock, it would reduce its taxable income to $40,000. Therefore, save the startup money on their taxes and help them keep more profits.

How to Qualify for Section 1244

To qualify for section 1244, a domestic corporation must issue the stock. The corporation must also have existed for at least three years and have total assets of $5 million or less at the time the stock is issued. In addition, the corporation cannot have any class of preferred stock outstanding at the time the stock allocates. 

So, to qualify for section 1244 stock, ensure that your corporation meets all of these requirements. If it does, you will be able to deduct any losses from dispositions of the stock from your ordinary income. This section can help reduce your tax liability and keep more of your profits.

Next Steps

Explore our tax planning tools to take the most advantage of your investments. Get started with our calculator. Or access our previous definitions to know more!

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