Small Business Stock Loss Deduction (Sec. 1244)

What is Section 1244 ?

Section 1244 is the IRS provision enacted to allow shareholders of  small business corporations (corporation’s equity may not exceed $1,000,000 at the time the stock was issued) to dispose  their stock as an ordinary loss, which is likely to be a significant impact difference on a shareholder’s personal return from stock being treated as a capital asset and hence losses being deducted as capital losses, provided the qualifications and limits found below are met.  If you own stock in a small “domestic corporation” (note: as LLCs are state created entities that are taxed differently than corporations the membership interest in the LLC cannot be treated as section 1244 stock as defined in Title 26) and you plan to dispose of it for a given tax year, certain qualification requirements must be met.

Meeting the Sec. 1244 Requirement

  • The corporation must be a domestic small business corporation.  A domestic corporation (including an S corporation) qualifies as a small business corporation if, when the stock is issued, its aggregate capital does not exceed $1,000,000.
  • The stock must have been issued in exchange for money or property (other than stock and securities) and not inheritance or gift.  Therefore, stock issued for services or other does not qualify under Sec. 1244.
  • Only the original owner of the stock is entitled to claim a Sec. 1244 stock loss.  If a partnership purchases Section 1244 stock of another company, and later disposes of the stock at a loss, the partnership entity may pass the resulting loss through to its partners.  However, to be allowed to claim the loss as an ordinary loss instead of a capital loss, the partner must have been a partner when the stock was issued and have remained so until the time of the loss.
  • Section 1244 is available only for losses sustained by shareholders who are individuals.  Losses sustained on stock held by a corporation, trust or estate do not qualify for 1244 treatment.  In limited cases, a partnership can qualify as a shareholder of 1244 stock.  Generally, all transfers of 1244 stock by the shareholder, whether in a taxable or nontaxable transaction, whether by death, gift, sale or exchange revoke 1244 status.

Sec. 1244 Limits

Provided all of the requirements listed above are met, ordinary loss treatment for losses that arise for stock disposition are allowed.  However, there are limits to the the amount of ordinary loss that an individual taxpayer may realize by reason of the small business stock provision.  Any amount of Sec. 1244 loss in excess of this limitation is treated as a capital loss (there is no carry-forward). For losses incurred by unmarried individuals, the maximum amount they may claim as an ordinary loss for all losses sustained on Sec. 1244 stock in a taxable year is $50,000.  For married individuals filing a joint return, up to $100,000 of the loss on Section 1244 stock may be claimed as an ordinary loss even if only one spouse owns the stock.

Recordkeeping

It is important that records are maintained for a minimum of five(5) years, and the records must show that the corporation’s stock qualifies as Section 1244 stock.

  • The corporate minutes/by-laws, should make reference to the issuance of Section1244 stock.
  • Keep records of gross receipts for the past five(5) years.

Understanding and unearthing all the caveats in the IRS tax code can be a daunting task for even the most sophisticated business owners and taxpayers, therefore it is always a good idea to consult a tax professional like those found at TaxPM who can help you review, and if necessary revise your tax filings.

 

Don’t be misinformed in 2018 regarding ACA (Affordable Care Act)

 

One of the biggest benefits (besides adjusting income tax brackets and their respective percentages) of the Tax Cut Jobs Act (TCJA) Trumpeted by the Trump administration was the repeal of the “individual mandate penalty”.  However, although other provisions of the tax bill took effect in 2018, the individual mandate penalty, which penalized taxpayers that did not carry health insurance for at least 9 months out of the year, will not be eliminated until the 2019 tax year.

Despite strong opposition to the penalty as being extremely unfair to the poorest of taxpayers (80% of those who paid the penalty earned less than $50,000/yr.), the penalty has increased steadily since it’s 2014 debut.

The Individual Mandate Penalty Started Out Small But Has Grown Over Time

•     In 2014, the punishment was $95 per uninsured adult ($47.50 per child), up to $285 per family, OR 1 percent of household income. The IRS released statistics that among filers who owed a penalty for the tax year ending 2014, the average penalty was $210.

•     In 2015, the penalty would be raised to $325 per uninsured adult ($162.50 per child), up to $975 per family, OR 2 percent of household income. The IRS released statistics that among filers who owed a penalty for the tax year ending 2015, the average penalty rose over 125% year-to-year to $470.

•     In 2016, the penalty was again significantly raised to $695 per uninsured adult ($347.50 per child), up to $2,085 per family, or 2.5 percent of household income.

The 2.5 percent of household income penalty has remained constant since 2016, and in 2018 will remain at $695 per uninsured adult ($347.50 per child), up to $2,085 per family, or 2.5 percent of household income.

In closing, it is important to remember that although the individual mandate penalty was eliminated as part of the tax cut legislation passed in December 2017, this penalty assessed by the IRS will still be in effect for the tax year 2018.

Monday, Monday..So Good To Me

Monday, Monday, so good to me
Monday mornin´, it was all I hoped it would be
Oh Monday mornin´, Monday mornin´ couldn´t guarantee
That Monday evenin´ you would still be here with me

                                                       -The Mamas & The Papas

Short-term relief as Trump and Dems reach a temporary deal to end partial shutdown

Amid the ongoing political chaos in Washington a comprise was reached to end the partial government shutdown.  But will the “relief” still be here with us past “Monday evenin’ (February 18th) as the measure signed by The President appears to be only active for three weeks, ending on Friday February 15th.  What then?  Nobody knows… What we do know is that 100’s of thousands of federal government employees will be singing “Monday, Monday…” this coming week, which comes with no “…guarantee” that they won’t be furloughed again in less than a month.

 

Backlogged IRS

News of the temporary relief agreement couldn’t have come at a better time for the Internal Revenue Service, who after years of being de-funded and being already depleted of resources is set to kick-off the start of Tax Filing Season come Monday.  Officials at the I.R.S. had already briefed some congressional members Friday morning of the dire state of the agency which had piled up millions of documents as well as leaving millions of calls unanswered.  It makes for a powder keg and stressed work environment, when even with the agency’s operational capacity being restored during it’s most crucial time of the year, the prospects that Monday evenin’ of February 18th the political circus may be replaying itself.

 

IRS confirmed it will process tax returns beginning Jan. 28

Despite the ongoing government shutdown, Office of Management and Budget Director Russell Vought issued a statement yesterday that tax refunds will go out as scheduled, unlike in previous shutdowns.  The Internal Revenue Service has given the green light to processing returns as it set the date to being accepting returns beginning Jan 28th.

IRS Commissioner Chuck Rettig said on Monday, “we are committed to ensuring that taxpayers receive their refunds notwithstanding the government shutdown. I appreciate the hard work of the employees and their commitment to the taxpayers during this period.” The IRS doesn’t normally issue refunds during a shutdown, however Rettig said the IRS has “consistently been of the view that it has the authority to pay refunds despite a lapse in annual appropriations.”

The IRS closure during the partial government shutdown couldn’t have come at worse time for taxpayers looking for answers to the changes brought about by the Tax Cuts and Jobs Act of 2017 signed by President Donald Trump on Dec. 20, 2017.  With almost 90% of the IRS workforce on furlough it’s unlikely that many taxpayers will be able to reach the IRS for help during the ongoing shutdown.

The filing deadline to submit 2018 tax returns is Monday, April 15 for most taxpayers.  Taxpayers in in Maine and Massachusetts are granted a couple of extra days due to the Patriots’ Day holiday on April 15, likewise those residing in the District of Columbia where Emancipation Day holiday is being observed on April 16 also do not have to file until April 17th.