Hello and thank you for your question.
You should be able to use your stock loss as a deduction against
ordinary income, by qualifying the stock investment as Section 1244
You would also be able to use your loan loss as a deduction against
ordinary income, but only if you can qualifying the loan as a business
loan. If the loan was a nonbusiness loan (see below for the
distinction) then the loss on the loan is a capital loss.
You'll need a good accountant to help you properly substantiate
business loan treatment, and to figure out the amount of these losses.
For the stock investment, up to $50,000 of the loss [$100,000 if
filing jointly] should be able to qualify for ordinary loss treatment,
meaning it can be deducted against ordinary (salary, etc.) income.
For the loan, if it is a "business bad debt" you can likewise deduct
the loss against ordinary income, while if it is a "nonbusiness bad
debt" your loss is a capital loss, limited to sheltering $3,000 per
year of ordinary income and otherwise only as an offset to long term
"Section 1244 (Small Business) Stock
Individuals report ordinary losses from the sale or exchange
(including worthlessness) of section 1244 (small business) stock on
To qualify as section 1244 stock, all ... of the following
requirements must be met.
You acquired the stock after June 30, 1958, upon original issuance of
the shares from a domestic corporation (or the stock was acquired by a
partnership in which you were a partner continuously from the date the
stock was issued until the time of the loss).
[The] total amount of money and other property received by the
corporation for its stock as a contribution to capital and paid-in
surplus generally may not exceed $1 million.
The stock was issued for money or other property (excluding stock or securities).
The corporation, for its 5 most recent tax years ending before the
date of the loss, derived more than 50% of its gross receipts from
sources other than royalties, rents, dividends, interest, annuities,
and gains from sales and exchanges of stocks or securities. (If the
corporation was in existence for at least 1 tax year but fewer than 5
tax years ending before the date of the loss, the 50% test applies for
the tax years ending before that date. If the corporation was not in
existence for at least 1 tax year ending before the date of the loss,
the 50% test applies for the entire period ending before that date.)
The 50% test does not apply if the corporation's deductions (other
than the net operating loss and dividends-received deductions)
exceeded its gross income during the applicable period. But this
exception to the 50% test applies only if the corporation was largely
an operating company within the 5 most recent tax years ending before
the date of the loss (or, if less, the entire period the corporation
was in existence).
The maximum amount that may be treated as an ordinary loss is $50,000
($100,000 if married filing jointly)."
"If a shareholder lends money to a corporation in his or her capacity
as an investor, any resulting bad debt generally is classified as
nonbusiness. However, if the loan is made in some capacity that
qualifies as a trade or business, the shareholder-creditor can incur a
business bad debt. Employee status is a trade or business, and a loss
on a loan made to protect the shareholder's position as an employee
qualifies for business bad debt treatment."
"An employee who loans money to his employer with the motive of
retaining his job has a case for claiming a business bad debt, but
what if the employee is also an investor in the company? The Supreme
Court ruled in Generes that the test must be whether the dominant
motive was business. In that case, a taxpayer who owned 44% of a
construction company and was paid $12,000 per year for serving as
president on a part-time basis, loaned the company a considerable
amount of money. He sought to deduct the losses on such loans as
business because a significant motive in loaning the money was
business. The Court, in deciding for the government, said that the
test must be that of a dominant business motive because among other
* The code considers the distinction between business and nonbusiness
to be important.
* Without the dominant motive test, employee-shareholders would always
have at least a significant business motive. The thrust of Generes has
been to make business bad debt treatment more difficult to attain."
As noted above, you'll need a good accountant to help you get this
right. Probably you won't need an attorney unless you're called on to
defend the business bad debt position in the event of an audit.
Search terms used:
"shareholder loan" "bad debt"
stockholder "bad debt" business nonbusiness
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