 Hello and welcome to the session in which we will discuss worthless securities and section one two four four stocks We're gonna start by discussing worthless securities. What are securities? Securities are any stocks bonds notes and worthless mean when you have those notes and they go down to zero Now in case you're hearing some background noise. This is it's tundering out there. So just FYI It's really raining and tundering Now I have my own experience with worthless securities during the dot-com of 99 I purchased stocks in a company called global crossing That's the company that laid down the fiber up the cables for the internet, you know across the oceans And what happened is this I bought this company a little bit late and it's a growth stage Well after they allow that lay down the cable the the company had no cash really It was not generating any cash and it went out of business Therefore my stock went down to zero now when that happened you assume the stock went down to zero During the last day of the year during the last day of the year So if it happens April 2nd Well, you would say well the date of my worthless securities the transaction took place at 1231 for that year What type of deduction do you have that's very important? So let's assume you purchase the stock March 1st of 20x1 Then the stop then the stock goes down to zero the following year February February 4th 20x2 Okay. Now. This is less than a year. This is approximately 11 Month Well, this is short term. Well, no it doesn't what you would do You would assume that you held the stock from March 1st 20x1 Until December 31st 20x2 and this makes it a long term Capital loss now assuming you purchased it in March and it went bust in May, June, July During that year x1 then it will be short term. Now. Remember losses will give you a deduction a Capital losses give you a deduction maximum of three thousand or you can use them against capital gains Now we need to discuss with a section one two four four stock 1244 stock Before we proceed any further. I have a public announcement about my company farhat lectures comm Farhat accounting lectures is a supplemental educational tool That's gonna help you with your CPA exam preparation as well as your accounting courses My CPA material is aligned with your CPA review course such as Becker Roger Wiley Gleam miles my accounting courses are aligned with your accounting courses broken down by chapter and topics My resources consist of lectures multiple choice questions through false questions as well as exercises Go ahead start your free trial today Section 1244 stocks are stocks of companies that don't exceed one million dollar in the money raised So the total amount or other property received by the corporation for the stock as a Contribution to capital which is common stock or paid in surplus does not exceed a million dollars simply put the company started and The maximum when they started they debited cash or other property for a million and their common stock or capital surplus Or whatever you want to call the equity does not exceed a million. What are we talking about here? We're talking about small business small businesses. You might be saying a million dollar is a lot of money Well for you and I is a lot of money, but when you look at corporation and you compare Those corporation million-dollar corporation to billions and now Apple and Google are trillion-dollar corporation Those are small businesses. So what happened if you invest in those stocks and those small Business stock. Well, what happened if you invest in them? You're gonna get the best of two words So when it comes to taxes, you're gonna get the best of two words if you have a game on that stock Well, it's gonna be taxed as a long-term capital gain Even if you held it for less than a year, it's gonna be long-term capital gain So it's gonna be taxed either zero, which is no taxes 15 or 20 percent Depending on your long-term capital gain. It's never considered ordinary income even if it was short-term capital gain Then what about a loss? Well, when you have a loss, the loss is considered ordinary loss Well, what does that mean? It means it's not a capital loss. There's no three thousand dollar limit on 12 section 1244 stock So ordinary loss Treatment per year is limited to guess what? $50,000 if you're single and $100,000 for married filing jointly and that's a lot of deduction This means you can take the losses against your W2 wages up to 50,000 if you are single Now losses that are in access of this amount whether it's 50 or a hundred thousand dollar They are treated as capital losses for future years Which you can either use against your capital gains or start to deduct three thousand dollar per year Now why the generosity? Well, Congress wants to encourage Capital providers it means investors people with money to invest in small businesses How do they encourage you to do that? Well, they would say go ahead and invest Your gain will be treated as a long-term long-term capital gain and if the business did not succeed We're gonna treat your losses as ordinary losses. That's the best of both words And the reason is to create more job and stimulate the economy by encouraging People people with money to invest in other small businesses. Let's take a look at an example for section 1244 stock Let's assume Adam purchases from XYZ corporations stock costing 170 so Adam invested in this corporation the total common stock outstanding for this company is 800,000 This makes it section 1244 stock The following year 20 x 8 Adam sells the stock for 80,000 it was for 90,000 It was not a good investment Adam generated losses of 80,000 dollar now Adam is a single taxpayer So losses of 80,000 dollar here. So how we're gonna treat this of that? 80,000 dollar 50,000 will be considered what will be considered against? Ordinary losses and it'll be used against w2 wages or any other ordinary income. What's left is? 30,000 the remaining 30,000 it's gonna be considered long-term capital loss It's gonna reduce future capital gains in future years or you can deduct 3,000 of it You know and the next following that are the following years until it's used up Let's take a look at another example Adam and Maria file a joint return salaries were 130,000 loss on sale of section 1244 stock purchase two years ago 120,000 that's a loss Gain on sale of section 1244 purchase seven month ago 27,000 Non-business bet that 12,000 computer adjusted gross income or simply put what's the net gross income? Well, here's what's gonna happen. The first thing we're gonna take a look at is salaries. They have 130,000 in salaries We're gonna be using 100,000 of this remember. They are married filing jointly. You're gonna be used 100,000 To deduct it against their salaries their married filing jolly. They could deduct up to 100,000 Remember, this is section 1244 now. They still have losses of 30,000 next thing you do is you will take their gains on sexual section 1244, which is long-term capital gains and you will deduct this against short-term Capital loss non-business bet that remember non-business bet that is always short-term capital loss So let's do that. So we're gonna take 27,000 of gains minus 12,000 of capital losses. We're gonna have 15,000 of now Section 1244 gains now What's gonna happen is we're gonna have sorry. We're gonna have 20 30,000 dollar left from salary. So salaries $30,000 still taxable and we still have from the 120 gains Let's take a look at another example Adam and Maria file a joint return salaries 130,000 Loss on sale of section 1244 stock purchase two years ago 120 Gain on sale of section 1244 stock purchase seven month ago 27,000 Non-business bet that is 12,000. Let's compute their taxable income or adjusted gross income It doesn't matter what what do you want to call it? Let's go ahead and perform this computation The first thing I'm gonna do is of this 120,000 since this is a loss on sexual Section 1244. I'm gonna use 100,000 of it against salaries Why because I can use it although it's It's it's a stock, but I can use it against ordinary income. So I'm gonna use 100,000 of section 1244 Therefore what's left in my taxable income is 30,000 now what's left from this 120 is 20,000 of losses that I'm gonna take section 1244 stock purchase seven month ago, which is long-term Capital gain and I'm gonna reduce it against short-term Capital loss remember non-business debt is a short-term capital loss We looked at this in another session. Therefore if I take 27 of gains 12,000 of short-term capital losses what I'm left with is 15,000 long-term capital gain now What I'm gonna do that 15,000 long-term capital gain now. I'm gonna be using the of that. I'm gonna be using 15,000 of long-term capital loss long-term long-term capital loss and Reduce this to zero that I'm gonna have left some since I reduce this since I used up 15,000 out of this loss what I'm left is 5,000 so basically the gain is all gone I'm left with 5,000 and of this 5,000 what can I do? I can deduct 3,000 remember I can take $3,000 per year. So I'm gonna take this 3,000 so I'm gonna reduce this 30,000 by 3,000 now my taxable income what's left is 27,000 and of the 5,000 I still have 2,000 capital loss I can use for future years Few things to remember here the first thing what students make the common mistakes that student make they take the losses and the gains From section 1244 and they net them don't make this mistake because the government Gives you the option not the option the right to take the losses of 12 section 1244 against your ordinary income You can deduct 100,000 the first thing you do your best interest is to reduce your salaries We reduce the salaries to 30,000 and We kept the 20,000 for later then we reduce the 27,000 long-term capital gain Against the short-term capital loss and that kept us with 15,000 then we used the 20,000 From the losses to reduce the game down to 0 with left with 5 we can deduct an additional 3,000 this year and the remaining 2004 future years what should you do now go to far hat lectures and look at mcqs. That's gonna help you with Worthless securities and section 1244 stock. Good luck Study hard invest in yourself whether you are a CPA candidate accounting student or an enrolled agent and stay safe