Tax Law (Questions About Taxes)/Section 1244 stock loss

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Question
Hello Adam,

A client of mine opened a deli, S-Corp, in Feb of this year and by Sep the business had closed down.  He invested over $100k of his own money and lost his entire investment.  It's my understanding that he's eligible for the Section 1244 lost treatment, but I want to be certain on some things.

1. He never actually sold the stock it became worthless, is he still eligible for the loss?

2. When the company was formed, approximately $20k was allocated to common stock and $80k was a loan from shareholder, again, is he still eligible for the loss?

3. When the final tax return is filed at a loss, must this amount be reduced by his basis in the stock?

4. If he is in fact eligible, is the first $50k reported on Form 4797 and the remaining on Schedule D since he's single.

I thank you in advance for your help and Happy New Year.

Jeff

Answer
Hi Jeff,

Section 1244 is a great tool for small business, and I encourage you and your client to benefit from.

The answer to your questions are as follows:

1- Yes, he is eligible for the 1244 loss. Your client exchanged $100,000 for the stock in his S-corp.
2- Yes, he is entitled to the whole $100,000 in 1244 loss.
3-Yes, he has to reduce the loss by the amount of 1244 loss write off.
4- Since he is filing single, he is limited to 50,000 as 1244 losses and the rest is a Schedule D losses.

I hope this answered your question.

Regards,
Abraham Itani, CPA

P.S. please rate my answer.

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ABRAHAM ITANI, CPA

Expertise

TAX QUESTIONS DOMESTIC AND INTERNATIONAL OUTBOUND AND INBOUND. FBAR COMPLIANCE. CORPORATE, PERSONAL, PARTNERSHIP, PASS TROUGH ENTITIES, S-CORPORATION, LLC, TRUST, GIFT TAX, 1120, 1040, LATE FILING, NON FILING, AMT, FTC.

Experience

MORE THAN 10 YEARS OF STATE AUDIT TAXATION, MORE THAN 10 YEARS OF PRIVATE AND PUBLIC TAX EXPERIENCE WITH ITANI ACCOUNTING AND TAX, KPMG AND MNP. DEALING WITH HIGH NET WEALTH INDIVIDUALS, LARGE PARTNERSHIPS, EXPAT., CFC AND PFIC. DEALING WITH TAXING AUTHORITY ON ISSUES OF NON FILINGS AND LATE FILINGS.

Organizations
MEMBER OF AICPA, AND NJSCPA.

Education/Credentials
CERTIFIED PUBLIC ACCOUNTANT IN NEW JERSEY AND COLORADO.

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