SMALL BUSINESS STOCK

SMALL BUSINESS STOCK – IS STOCK (COMMON OR PREFERRED, VOTING OR NONVOTING) OF A SMALL BUSINESS CORPORATION HELD SINCE ITS ISSUANCE (E.G., NOT ACQUIRED BY GIFT OR SUBSEQUENT PURCHASES) AND ISSUED FOR MONEY OR OTHER PROPERTY (NOT STOCK OR SECURITIES).

a.       Up to $50,000 ($100,000 if joint return) of loss realized on disposition or worthlessness of Sec. 1244 stock is treated as an ordinary loss. The limit applies to Sec. 1244 stock held in all corporations. The limit is applied at the partner level, if applicable. The loss is considered to be from a trade or business for NOL purposes.

b.      To be classified as a small business corporation, the aggregate total amount of money and other property received by the corporation for stock, as a contribution to capital and as paid in surplus, cannot be in excess of $1 Million.

1)      However, even if the paid-in capital exceeds the threshold of $1 million, part of the stock (up to $1 million) may be designated by the corporation as qualifying for Sec. 1244 ordinary loss treatment.

c.        Any excess of basis over FMV of depreciated property at the time of its contribution in exchange for Sec. 1244 stock is treated as capital loss (to the extent thereof) before any other realized loss may be treated as ordinary.

1)      Basis in the stock is equal to the property’s basis in the hands of the transferor when contributed.

2)      When an owner of Sec. 1244 stock makes an additional capital contribution but does not receive any additional shares of stock, the additional investment cost is added to the basis of the previously held stock. However, the additional basis does not qualify for the Sec. 1244 ordinary loss treatment. Therefore, any future loss must be apportioned between the qualifying Sec. 1244 stock and the additional capital interest.

The difference between ordinary loss and a capital loss is the amount that you may deduct per year. Capital losses are deductible up to $3,000 per year with the difference carrying forward indefinitely. However, an ordinary loss has no $ limits.

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