1244 stock is a classification on investments used when filing a capital loss on personal taxes with the Internal Revenue Service (IRS). Usually, there is a $3,000 US Dollars (USD) limit on losses that can be counted against personal income. With a 1244 stock, individuals can write off up to $50,000 USD as ordinary loss.
For example, an individual shareholder Bob invests $100,000 USD in stock of Corporation A. Corporation A has a difficult year and its shares drop dramatically, so Bob sells his shares off for $40,000 USD, creating a loss of $60,000 USD. His additional investments are doing well, so he has $10,000 USD in capital gains from other investment sources. Usually, he would be able to claim $10,000 USD capital losses against his capital gains and an additional $3,000 USD of ordinary loss against his other regular W2 income. If the stock in Corporation A qualifies for 1244 status, he can now claim not only the $10,000 USD capital loss against his capital gains, but the additional $50,000 USD in ordinary losses against his regular W2 income.
There are a few strict requirements that must be met for a stock to qualify as a section 1244 stock. The business must be a small corporation, meaning that the gross receipts including stock sales must not be greater than $1,000,000 USD. It also must have become a corporation after 6 November 1978. For the past five years, the corporation must have received more than 50% of its income from sources outside of its exchange related activities like royalties, dividends, interest, annuities, and sales of securities.
A 1244 stock loss can only be claimed by an individual or partnership, not another corporation or estate. It must have been purchased on the original public offering. The stock itself must be either a common or preferred stock that was purchased with cash or for property, not in exchange of other stock or for services.
The stock is reported on IRS section 1244 form 4797 Part II. The stockholder who claims the loss must keep records that set the Section 1244 stock apart from their other stocks. The IRS requires them to keep detailed documentation. Records should include information that show that the corporation qualifies as a small business corporation and that they were the original holders of the stock, the amount the stock was purchased for and proof that it was a cash or property exchange, any information about property transfers for the stock or dividends issued on it as well as company receipts data for the past five years. In the case of an audit, these documents are required to prove the shareholder's claim that the investment was a 1244 stock.
