Asset basis for construction performed by related party

S Corp A and S Corp B are both owned by one shareholder. S Corp B is a construction company, S Corp A is a rental real estate company. The owner/shareholder would like to have B do extensive remodeling to a commercial building owned by A. I know the actual costs of the remodeling can be added to A's basis in the building, but can B charge A a 10% Contractors fee for the work and that also be added to A's basis in the building? My concern is related party transactions coming into play due to the common ownership of both companies.

Are you asking whether, at the cost of immediate taxable income, can A get a basis step-up?

A wants to pay B to do the remodeling and pay B a 10% contractors fee, adding the remodeling costs plus the 10% contractors fee to the basis of the building. B would recognize the 10% fee as income.

Go for it. Why do you think there could be a problem? Is 10% a normal fee?

Check out section 1.263A-1(j).

(j) Special rules—
(1) Costs provided by a related person—
(i) In general. A taxpayer subject to section 263A must capitalize an arm's-length charge for any section 263A costs (e.g., costs of materials, labor, or services) incurred by a related person that are properly allocable to the property produced or property acquired for resale by the taxpayer. Both the taxpayer and the related person must account for the transaction as if an arm's-length charge had been incurred by the taxpayer with respect to its property produced or property acquired for resale. For purposes of this paragraph (j)(1)(i), a taxpayer is considered related to another person if the taxpayer and such person are described in section 482. Further, for purposes of this paragraph (j)(1)(i), arm's-length charge means the arm's-length charge (or other appropriate charge where permitted and applicable) under the principles of section 482. Any correlative adjustments necessary because of the arm's-length charge requirement of this paragraph (j)(1)(i) shall be determined under the principles of section 482.