Section 1244 criteria

[Kham]

IRC Section 1244 question: Can someone please clarify I.R.C. § 1244(c)(3)(A)'s "For purposes of this section, a corporation shall be treated as a small business corporation if the AGGREGATE AMOUNT OF MONEY and other property received by the corporation for stock, as a contribution to capital, and as PAID-IN SURPLUS, does not exceed $1,000,000. The DETEMINATION under the preceding sentence shall be made AS OF THE TIME OF THE ISSUANCE of the stock in question but shall include amounts received for such stock and for all stock theretofore issued."

I think it means that once any/all investments in small start up company securities pass $1 million, no further investments can be treated as Section 1244 - regardless of whether the company has continually lost money and there is never a yearly average balance of more than $1 million. But others are telling me that stock issuances are allowed subsequent to the initial $1 million threshold - if at the time of the new issuances, the company's balance is below $1 million

[Mike9241]

does not exceed $1,000,000. The determination under the preceding sentence shall be made as of the time of the issuance of the stock in question but shall include amounts received for such stock and for all stock theretofore issued.  theretofore  = previously 

reg 1.1244(c) - 1(b)

An increase in the basis of outstanding stock as a result of a contribution to capital is not treated as an issuance of stock under section 1244.

so 1000 shares issued for $500,000 then another 1000 shares issued for $500,000 ok it at the max all 1244 stock

so 1000 shares issued for $500,000 then stockholder contributes another $500,000 but no new stock only the original $500,000 qualifies as 1244 based on the reg.

nothing in the code or regs say that the $1M can be replenished due to losses. 

[Kham]

Thanks, Mike...but to make sure I'm understanding, let me ask this way...

Once a new company receives $1 million via the sale of stock to angel investors, any additional $ investment received by company for the sale of its stock... above and beyond that first $1 million is NOT eligible for 1244 treatment....right?

[JulieS · Accepted solution]

Yes, that is correct. 

[riskfocus]

How do I report Section 1244 loss via TurboTax Desktop 2023?

[PatriciaV]

The sale of Section 1244 stock is entered under Wages & Income >> Investment Income >> Stocks, Cryptocurrency, etc. Or use the Search tool to jump to "stock."

1. Add or start a new sale.
2. Choose "Other" (ignore 1099-S notation) and Continue.
3. Name the sale (include "1244" to help identify it later).
4. Type of Sale: Stock (non-employee).
5. Complete the rest of the sale information.
6. On the page "Let us know if any of these situations apply to this sale," check the box for "This was small business stock." Click the blue Learn More hyperlink for more information on this choice, including the rules for Section 1244 stock sales.
7. On the page "What kind of small business stock did you sell?" check the box for Section 1244 stock. 
8. You then have the option to edit or delete (trashcan) your entry as needed.
9. Add another sale of this type or click Continue to return to your list of investment sales.

To review the results of your entry, go to Forms Mode and open the Capital g/l adj [stock description] form. Scroll down to Part IV and note the line "Sec. 1244 loss on Form 4797" and the amount of the loss. You'll find the entire loss flows to Form 4797 p1 Part II Line 10.

@riskfocus