So your thinking about investing in a risky business and wonder what the tax consequences will be should the business end up in a loss?
Here’s what you should know.
You should avail your self of Section 1244. Here is a IRC section that will give you a ordinary loss of up to $100,000 should the stock become worthless. Compare this with only a $3,000 a year capital loss.
To qualify for this tax treatment you must satisfy certain requirements. Briefly they are the corporation must have issued the stock directly to you, in exchange for either cash or property (not services), the company must have invested capital under $1million (S corp or C corp) and there must be less than 50% of income in the form of rents, royalties and dividends.
Should there a gain from the sale of your company stock, you can exclude 100% of the gain from the sale of the stock if you held the stock for more than 5 years. (after 12/31/13 only a 50% exclusion of gains is available at this time).
To qualify for this gain exclusion the rules are briefly the stock must have been issued after 8/10/93, the stock couldn’t be acquired in exchange for other stock, must be a C corporation, at least 80% of the assets must be used in the active conduct of its business, can’t be a personal service corporation (e.g. law , health, financial)…, not have more than $50 million of assets at the time shares were issued and stock must be held for more than 5 years.
Very truly yours,