What’s the proper way to account for contributions made in the organizational phase of a partnership or corporation when the contributions are non-cash? For example, a personal fax or tools or vehicles are used to fund the start up of the new entity. Are there any differences between a c or s-corp and a partnership.
debit assets, credit members’ contributions. be sure to have something in writing that supports the items that are being contributed to the entity along with the value. doing it in the form of a letter or memo is ok.
I also recommend some amount of cash ($100) since a company needs cash to “operate.” any additional cash can be in the form of a loan.
and to just add a bit of granularity to Marc’s comment, in general with a corporation, you’ll use the same basis in the corporation as the asset had for the contributor…
For a partnership, you would also sort of do that. But there’s also this thing called Sec. 751 capital account maintenance which requires you to also keep your books on another basis using, in effect, fair market values. That’s way beyond the scope of this forum though…
Thanks guys.
Steve, just to clarify. If a corporation founder bought a printer for $200 2 years ago, his basis for the contribution is $200 even though the FMV is much less?
Can you recommend a resource to learn more about sec 751 other than IRS.gov?
Wouldn’t the owner have depreciated the printer down to nothing? So I think it’d be more likely that this basis would be zero… and that the FMV would be something like $50 or whatever. And in this case–which is what I was thinking about–the corporation’s or partnership’s tax basis would be $0.
As for Sec. 751, oh-oh, I have no idea why I gave that code reference. Obviously a synapse misfired. Sorry. I think the right code section is 704. As far a good place to learn about that (other than an expensive tax law book)… hmmm, how about “The Logic of Subchapter K”… It’s about 190pp, written by two tax law professors, and really quite a good little book.
When I took the partnership tax law class required for my MS in tax, I remember that there were two groups of students in the class (class was CPAs and attorneys)… those who understood the big picture because of this little book… and those who didn’t because they didnt’ get this little book.
Thanks, Steve.
It’s sounds like funding with cash and buying the assets would be less complicated.
My (current) new operating philosophy for helping people set up their accounting systems… Keep it simple.
Sure, as an accountant, I’m programmed to want to do things in a way that produces precision, etc., incremental tax benefits, etc. But especially with small businesses, the complexity can just overwhelm the owners. Yikes.
So that’s a long-winded way to say, “simple is good.”