Category: Incorporation Resources

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.


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.


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.

Texas Corporation Compliance

Corporate compliance is a term that people have started using more frequently in the last few years. This is quite natural because the number of corporations in Texas is growing rapidly. Unlike in the past, companies today are not free to do what they want. The laws and regulations are here to create a balance between rationality and ethics. For instance, companies can’t ask their employees to work for countless hours per week without a break just because there is a high unemployment rate in the area and they can find workers willing to do this. In addition, they can’t pollute the environment just because this will help them cut the expenses.

Industry standards, agency law, state laws and federal laws are the forms of the law and regulation for corporations in Texas. So, those who will form a corporation must take specific steps regularly in order to keep their company in compliance. So, there are some specific requirements that every Texas Corporation must meet.

Annual Report

This is a detailed report that has one objective – to provide information to shareholders as well to other interested parties about the activities and financial transactions and overall performance of the company in the past year.

Franchise Tax Report

The franchise tax represents a privilege tax that every taxable entity in Texas must pay. The annual franchise tax report is due May 15th. In case this day falls on a holiday or weekend, the due date is moved to the next business day. So, the franchise tax report is the report to the state of Texas that includes information about the annualized total revenue and calculation of the tax you are paying as a company.  You can send the franchise tax report in a few different ways – with the help of certified electronic submission software providers, electronic services or simply download and print the necessary forms and mail them. There are a few forms to choose from and that’s why we recommend using professional help in this process.

Texas Business License

According to some sources, there are more than 250 occupational, professional and facility business licenses that people and organizations in Texas can obtain from the state. There is more than one reason why business licenses were introduced in Texas. They are here to make the identification process of companies easier and to add a sense of responsibility and accountability for the owners’ activities. In addition, they make taxation simpler. Finally, they keep the general public’s health and safety protected.

Texas Corporate Records

The principal office of any corporation in Texas is the place where the corporate records must be stored. These records can include different kinds of items, but there are a few of them that must be available to the authorities at any time. These corporate records include records of accounts and books of accounts, a clear list of past and current shareholders with their personal information, minutes of shareholder and director meetings and a stock transfer ledger with information about the initial issuance of shares as well as information about all the transfers.






Selecting the Right Business Structure – LLC Vs S-Corp

Did you know that Texas is home to 92 Fortune 500 companies? (1) This is not a surprise for many experts because doing business in Texas is much easier compared to many other states. If you are interested in starting a new business in Texas or you already own one that is not incorporated yet, you should take a few things into account. The most important one is to select the right business structure for your business. Typically, people are making a choice between an S-Corp and a Limited Liability Company or LLC. Before we go into details, let us highlight the basics of incorporation.

Why do you need incorporation in the first place?

The fact is that there is more than one good reason for incorporation. Yet, the crucial one is to protect your personal assets from a judgment or from creditors. But, keep in mind that there are many situations when a corporation wants to buy assets, like a corporate vehicle for their employees for example, and the bank that provides the loan will require a personal guarantee. In case you provide such guarantee, then this corporate asset won’t stay protected by the so-called corporate veil. Don’t forget that the same goes for both LLC and S-Corp. Another advantage of incorporation is to get specific tax benefits. Serious business owners are using professional accounting and tax service providers like TaxPM™. These professionals can provide valuable tips and advice related to tax issues.

What’s an S-Corp?

S-Corps are a type of corporations that are one level closer to a different tax categorization. Those who want to opt for S tax treatment must be employees of the corporation. We are talking about so-called pass-through entities that don’t have to pay corporate tax. The income received by the shareholders is taxed as individual income. However, an S-Corp is not allowed to have more than 100 shareholders and every shareholder must be a US citizen or at least a legal resident. In addition, S-Corp shareholders have equal voting power in the company.

What’s an LLC?

Limited Liability Company or simply LLC can usually provide better liability protection compared to S-Corp. This is a very popular option for many small businesses in Texas. Although it’s essentially a pass-through entity just like S-Corp, it can be taxed as a corporation. (2) Most owners like this business structure due to its flexibility. It’s easy to distribute the company income to specific individual members. They pay shares on their tax return. Another great advantage is that LLC doesn’t have a specific management or structure requirements that should be met.

Final Thoughts

No one can say which option is the best because different businesses have different requirements and needs. Generally speaking, LLCs are much better for small businesses as well as for start-ups. On the other hand, S-Corps are a better option for larger companies.

If you are interested in incorporation, use the professional help provided by experienced and knowledgeable experts in this field. Choose TaxPM™ for the best results.


Advantages of LLC Formation

There are many things that people should think about when they are planning on launching a new business in Texas. One of the crucial things in this process is to select the business structure that provides the greatest advantages to their business operations. According to some statistics, Limited Liability Companies or LLCs are the most common type of business entity in Texas. (1) On top of that, incorporation of LLC is not a difficult task. With the right help provided by true professionals like the ones from TaxPM, you should be able to finish this job without any hassles and in no time. LLC creates an ideal mixture of liability protection typical for corporations and flexibility usually found in partnership. It includes some of the best things from both worlds.

If you are still not sure whether you should select an LLC instead of a corporation, we will provide a list of advantages related to LLCs that should tell you whether your business is the right candidate for LLC incorporation/formation.

It keeps the personal assets protected

If you form an LLC, you will get a chance to keep your personal assets safe from the company assets in cases of company lawsuits. In other words, LLC keeps your personal assets protected at all time.

It can help you with taxation

This is another huge advantage of LLC incorporation because you will have an opportunity to select how exactly you are taxed. The tax rate associated with LLC is linked to the owner’s income. To put it in simple words, you can adjust the taxation and pay less in the end.

It avoids double taxation

As you are probably aware, corporations can’t avoid double taxation at least not completely. Namely, corporations are taking care of these taxes at the corporate level and after that, they are paying the taxes on the income which come in the form of dividends. But, LLC doesn’t have to deal with double taxation. You can file returns, but it’s better to rely on professional accounting services for this purpose.

Flexibility while doing business

In case you are managing an LLC, then you will have more options in how to manage your business. It’s possible to add new members to the business without following lengthy procedures. The main purpose of LLCs is to provide business owners flexible business structures that can help them run their companies smoothly.

It cuts IRS audit risks

When compared to a sole proprietorship, an LLC is at lower risk of audits. In case you are thinking about forming an LLC, then you should know that the risk of IRS audit is minimized. (2)

It allows leasing personal assets

Finally, it is possible to lease your own personal assets to your company. In other words, you can manage your LLC even from your home and report that the LLC is actually leasing the office space (your home) from you.

These are some of the things that make LLC a good option for those looking for the right business structure.