How to transfer property to an S Corporation?

The Value of Property Becomes the Basis of the Company

The value of property becomes the basis of the company when it is donated, transferred, or converted to an S corporation. The value is also added to the capital account of the shareholder who provided it.

Suppose you donate a relatively modern computer to the newly established S corporation. The “adjusted basis” of the computer is $1,500. You also contribute $10,000 in cash. Here’s how your capital account would look:

Owner’s Capital Account (as it will appear on the company’s balance sheet)

Cash $10,000

Equipment $1,500

Total Capital $11,500

Your total contribution to the S corporation is $11,500.

Note: Capital gain or loss will be calculated based on the amount of contribution if you later sell your share in the company.

How to Record Contributions

The basis of the company in donated property is the lesser amount between the fair market value (FMV) and the adjusted basis of the shareholder. The adjusted basis is the original cost of the property plus any improvements, any acquisition costs, and any selling costs minus any depreciation.

You need to calculate two numbers to know the value of your capital contribution and to calculate the company’s basis for depreciation: the fair market value of the computer you donated and the adjusted basis of the computer.

Example of Property Transfer

The computer in this scenario was personally owned by you. You did not use it as business property, nor did you claim any depreciation on it. You purchased the computer for $2,000, which includes shipping fees and taxes. The adjusted basis of the computer would be:

Original Cost $2,000 + Improvements $0 + Acquisition Costs $0 (since shipping and taxes were already included in the purchase price) + Selling Costs $0 – Depreciation $0 = Adjusted Basis of $2,000.

You then need to determine the fair market value of the computer. Check various sites like eBay and Craigslist. You might find that your computer model is selling for about $1,500 in good condition. You can expect to get around $1,500 if you decide to sell it in this condition, so this is the fair market value of the computer.

Note: Property is valued at the lesser of the adjusted basis or the fair market value at the time of donation or transfer to your S corporation.

Thus, the value of the computer is $1,500 since it is the lower of the two values. Consequently, your capital account is increased by $1,500, and the company can use $1,500 as the basis for depreciating the computer.

Frequently Asked Questions (FAQs)

How long does the bank require you to live in a home before converting it to investment property?

The general rule is that banks will ask you to live in the property for 12 months before they consider it investment property, but this is not a legal requirement. Sometimes banks make exceptions.

What happens to liabilities and assets when converting a disregarded LLC to an S corporation?

Not all states allow you to convert an LLC to an S corporation, and you may need to change the structure and ownership of your LLC even if your state allows it. You can then perform a legal transfer to carry over all liabilities and assets.

Updated by Beverly Bird

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Sources:

– Cornell Law School Legal Information Institute

– IRS

– Beverly Bird