How to deduct Worthless Stock as Ordinary Losses?
My wife and I have <$100k invested in a startup (S-corp) that went under this year. The owner said all operations are paused and the stock issued for our investment is worth $0. According to Section 1244 of the Form 4797 instruction form (https://www.irs.gov/pub/irs-prior/i4797--1995.pdf), this small business investment can be counted as ordinary loss and hence deducted from our AGI. I see there is an option to classify the stock as a Worthless Stock in the Investments and Savings tab, but it did not reduce our AGI. I am guessing it is still classifying it as a capital loss instead of an ordinary loss. If I try to fill out a Form 4749 under the Business Income tabs, I will need a K-1, which I do not have, and the business is not being prompt about getting it to me. I believe TurboTax has a method to deduct Worthless Stock without entering it as through a K-1. Thttps://www.irs.gov/instructions/i1040sd#en_US_2024_publink1000285579
Best Answer
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I do not want to take this as a capital loss. It qualifies to be classified as an ordinary loss under Section 1244 from the IRS. I received the below message from FTUSA Customer Support. Following this reported the loss as an ordinary loss on a Form 4797 line 10.
Hello,
Thank you for your patience while we have reviewed this situation.
Our software does support reporting information on Form 4797 Line 10. To do this, please go to the Income menu and select the "Sale Of Business Assets" line. Then select the "Sale of Business Assets Converted to Personal Use". Even though, your situation was not an asset converted to personal use, this is the correct area so that it will be reported on Form 4797 Line 10.
Then, you can work through the screens to provide the information that is needed for this situation. Line 10 is used for assets that are held less than one year, so you will want to make sure that you answer NO to the question "Was this asset held for more than a year?"
Then the software will use the information that you have provided to report this on Form 4797.
If you have additional questions, please let us know.
Regards,
Mary
Customer Support
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Answers
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Hi CitizenOfKane,
We do not currently support a small business investment loss on Form 4797 so that it can be reported as an ordinary loss. We do support it as a capital loss, but then it is limited to only $3,000 a year unless you have other capital gains.
You can take a capital loss on Schedule D in the year the security becomes totally worthless. The stock or bond must be completely worthless or permanently abandoned to be deducted. A deduction can't be taken for a partially worthless stock or bond.
Enter a worthless stock or bond on the Stock or Investment Sale Information screen. Enter a sales price of zero. Enter the cost basis (amount you paid) of the stock and the date it was acquired. Enter December 31, 2024 for the date sold since worthless stock is considered to be disposed of on the last day of the year. The resulting loss will be either long-term or short-term, depending on how long the stock was held.
On the Additional Investment Information screen, check the box indicating this is a disposal of worthless stock.
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