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Getting the Tax Deduction

Staff Writers

All physicians and other investors should know when their stock becomes worthless.

Example Scenario:

Some time ago, an FOB physician investor [Family Owned Business] founded two FOBs: One was doing fine while the other floundered. Under the IRS Tax Code, the investor can receive a loss deduction on the second FOB if: 1) the stock is worthless, and 2) the loss is claimed in the year it became worthless.

Definition of “Worthless”

The problem often is determining when a stock is completely “worthless”—there is no deduction for partial worthlessness. A company does not have to file for bankruptcy or end operations for its stock to be worthless.

Generally, if an FOB’s liability greatly exceeds its assets, and there is no real hope of continuing the business at a profit, the stock is considered worthless under the Tax Code. Often, to prove a worthless loss deduction, the business owner sells his or her stock at a nominal price.

Loss is Limited

The amount of the loss has traditionally been limited to the business owner’s tax basis. Capital losses are used to offset capital gain, but $3,000 can be used as a deduction against ordinary income. The $3,000 can be carried forward indefinitely.

Section 1244

If the business’s stock qualified as Section 1244 stock, the loss is an ordinary and fully deductible loss (subject to dollar limitations). In these cases, the loss is deductible against ordinary income. Obviously, if a loss is deductible against ordinary income in the first year, the taxpayer will receive a significant tax savings.

Most FOBs issue Section 1244 stock if it is qualified as a “small business corporation.”  To qualify, the total capital invested at the time the stock is issued cannot exceed $1 million. In addition, the FOB must have less than 50% of its gross receipts from passive sources: rents, royalties, dividends, and investment income.

In other words, the majority of the receipts must come from operating an active trade or business. Finally, the maximum loss is $50,000 for an individual; $100,000 for a couple. When organizing an FOB, the stock should be classified as Section 1244 stock if it qualifies.

Assessment

Financial professionals and accountants must advise their clients about “worthless” FOB stocks to ensure the deduction is claimed. Medical professionals should also be aware of this concept.

Conclusion

Have you ever had a worthless stock? How did you deal with it and what were your experiences? What has changed relative to the above review, if anything? Is Section 1244 indexed? Please opine and comment.

Related Information Sources:

Practice Management: http://www.springerpub.com/prod.aspx?prod_id=23759

Physician Financial Planning: http://www.jbpub.com/catalog/0763745790

Medical Risk Management: http://www.jbpub.com/catalog/9780763733421

Healthcare Organizations: www.HealthcareFinancials.com

Health Administration Terms: www.HealthDictionarySeries.com

Physician Advisors: www.CertifiedMedicalPlanner.com

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Filed under: Accounting, Alternative Investments, Investing, Portfolio Management, Taxation | Tagged: FOB, FOBs, Section 1244 stock loss, stock loss deduction, worthless stock |