STOCK OPTIONS – SMALL BUSINESS EMPLOYEES

Many small business employees may not be familiar with Code Section 1244 or 1202, but they should be.  These are the IRS Code Sections which allow for favorable gain exclusions or larger capital loss allowances on small business stock. 

IRC 1244 – Normally, stock is considered a capital asset and thus the loss is held to no more than $3,000 in any given year.  Section 1244 small business stock allows an owner to take up to a $50,000 loss on his or her stock.  Should both spouses co-own the business, losses up to a $100,000 can be taken.  Utilizing this code section can really help a small business owner’s cash flow!

IRC 1202 – 50% to 100% of the gain on this stock can be excluded from tax.  The rules and tax periods for which this code section can be utilized are tight, but what a great rule!  For example, stock options must be exercised and held for 5 years, not exercised and sold same day for instance.  Thus, one cannot use the grant date as the start date of their stock’s holding period. 

Maybe your stock sale qualifies, or qualified?