The distress associated with a business investment loss is slightly alleviated when the investor is entitled to a tax deduction for the invested money. The loss is deducted beginning in the year that there is no reasonable expectation of repayment. The entire amount of capital loss is applied to reduction of capital gain income on other properties.
Reducing ordinary income with capital losses is limited to $3,000 per year, but any excess is carried over to future years. Under certain conditions, business owners may deduct more of their loss on capital investment in a small-business corporation. This does not apply to unincorporated businesses. Losses on small-business stock require the complete liquidation of a corporation.
Simplified Investor Loss
Record on Schedule D the date of the investment and the date that the business investment became uncollectible.
Place a zero or the amount of any partial recovery of investment capital on Schedule D in the column for “Sales price.”
Enter the total amount of the investment capital on Schedule D in the column for “Cost or other basis.”
Calculate the loss and enter as a negative number on Schedule D in the column for “Gain or (loss).”
Small Corporation Loss
Confirm that the minutes to a meeting of the board of directors reflect passage of a resolution for issuance of stock under Section 1244 of the income tax code. The election may be executed at any time, but is normally passed at the initial organizational meeting of the corporation.
Verify that the individual with the investment loss is the original owner of the stock issued by the corporation.
Report the amount of the loss on Line 10 of Form 4797. The amount is limited to a loss of $50,000 per individual or $100,000 on a joint tax return. Any amount exceeding that limit is a capital loss reported on Schedule D.
To qualify for the larger loss deduction on Form 4797, the corporation must have derived the majority of its income from a trade or business and not from investment activity.
A loss between related people is not deductible unless it is a consequence of complete liquidation of a corporation.
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