Category: Annual Compliance and Renewal

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.


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.