If you have just participated, I recommend that you read the first part of this series. There, I summarize the rules in Section 1244 and explain how these rules may affect investors. This article, part two, will focus on additional aspects of the rules.
In the year that 1244 shares are sold or become worthless, investors are not limited by the restrictive capital loss rules imposed by Section 1211, as previously discussed. Instead, Section 1244 allows such investors to claim deductions for ordinary losses. The deductions are $100,000 for married couples filing joint 1040s and $50,000 for single and married individuals filing separate 1040s.
The faster-than-usual write-offs for 1,244 shares cover more than shares bought from start-up companies. They also cover shares subsequently purchased from companies in need of additional capital. The 1244 stock regulations include a relief provision for married couples who have opted out of joint ownership. Under this provision, a married couple need not hold the shares jointly to qualify for the maximum deduction of $100,000. Also, they need not have been married when the stock was issued.
If an investor’s 1244 loss is $110,000, while her spouse’s loss is nil, she can deduct $100,000 on a joint return. However, his remaining $10,000 falls under these less favorable 1211 rules. Let’s assume instead that his loss is well over the $100,000 limit. It would behoove him to unload his shares gradually as the limit is an annual basis, not a restriction on total losses of 1244 shares. If she can spread the loss over more than one year, more than $100,000 may qualify for ordinary loss treatment.
This possibility is quite attractive, and accountants should keep in mind that it is just one of the many reasons why choosing the 1244 option is worth considering in many new business situations.
For example, let’s say that a $220,000 investment in a company proves unsuccessful and the investor can dispose of his shares for $20,000. She sells 50% of her shares for $10,000 in December of the first year and does the same in January of the second year. She is then eligible for an ordinary write-off of $100,000 each year, for a total of $200,000.
On the other hand, if an investor’s loss is beyond the $100,000 limit, he or she will enjoy the same tax protection afforded to a partner or sole proprietor who suffers a loss due to worthlessness. of his business. Accordingly, the investor can avoid operating as a partner or owner. Of course, incorporation might have been a better strategic choice for reasons that have nothing to do with taxes – for example, exemption from liability.
Partnerships. The regulations provide guidelines for partners in a partnership that owns 1,244 shares. Persons who were partners when the share was issued receive ordinary loss deductions for the loss incurred by the partnership; the $100,000 or $50,000 limit is determined separately for each partner. Different rules apply when a partnership distributes the shares to partners who then turn around and sell, realizing the loss. They should treat them like capital, not ordinary.
And after. Part three will cover additional aspects of the rules, such as paperwork requirements and early audits.