To depreciate or not to depreciate THAT is the question

Any non-Tax accounting topics go here.
#1
CP Hay  
Posts:
226
Joined:
3-Apr-2019 5:24pm
Location:
NEW YORK (NY)
When someone contributes property to an S-Corp is that property depreciated? I'm almost certain that it is but what happens to machinery that's old and has little value?
 

#2
Posts:
6036
Joined:
22-Apr-2014 3:06pm
Location:
WA State
Property that fits the description of depreciable property should be depreciated because taxpayers have to account for depreciation allowed and allowable.
If the property was fully depreciated before it was contributed, there is nothing left to account for.
Does that answer your question?
~Captcook
 

#3
CP Hay  
Posts:
226
Joined:
3-Apr-2019 5:24pm
Location:
NEW YORK (NY)
Thanks for responding Capt! I believe the person had the property for personal use before contributing to the business so it wasn't depreciated prior.
 

#4
Nilodop  
Posts:
18751
Joined:
21-Apr-2014 9:28am
Location:
Pennsylvania
Depreciate lower of cost or value, which from what you say, would be value.
 

#5
Posts:
1716
Joined:
28-Jul-2017 12:08pm
Location:
Somewhere out there...
even though the depreciable value within the corporation is lower of basis / FMV, what is the shareholder's basis in the stock?
 

#6
Posts:
6036
Joined:
22-Apr-2014 3:06pm
Location:
WA State
HenryDavid wrote:even though the depreciable value within the corporation is lower of basis / FMV, what is the shareholder's basis in the stock?


Same as depreciable basis. If there were a decrease in the value, that decrease is personal in nature and not able to decrease a subsequent gain on the sale of s-corp stock. If there were an increase in value, it is an untaxed increase and won't add to taxable basis.
~Captcook
 

#7
Nilodop  
Posts:
18751
Joined:
21-Apr-2014 9:28am
Location:
Pennsylvania
Right answer. It's in 1.168(i)-4. But wait, that's a depreciation reg. Specifically, MACRS depreciation. Does it cover a non-depreciable such as stock? And is contributing it to a corporaion, S or C, the same as "converting" its use? Here is the exact quote:

§ 1.168(i)-4 Changes in use.
(a) Scope. This section provides the rules for determining the depreciation allowance for MACRS property (as defined in § 1.168(b)-1T(a)(2)) for which the use changes in the hands of the same taxpayer (change in the use). The allowance for depreciation under this section constitutes the amount of depreciation allowable under section 167(a) for the year of change and any subsequent taxable year. For purposes of this section, the year of change is the taxable year in which a change in the use occurs.


Conversion to business or income-producing use -
(1) Depreciation deduction allowable. This paragraph (b) applies to property that is converted from personal use to use in a taxpayer's trade or business, or for the production of income, during a taxable year. This conversion includes property that was previously used by the taxpayer for personal purposes, including real property (other than land) that is acquired before 1987 and converted from personal use to business or income-producing use after 1986, ...


So there must be some other rule that makes the stock or land or whatever take the lower basis. Thinking more about it, the transfer to the corp. is under 351, and therefore the basis of the stock is under 358 and of the asset is under 362, so unless we find a reason that the basis rule reduces it to value, ...

So someone find that rule please. I'm sure it exists.

Wait! Is this it? And does it apply in OP facts?
§ 1.165-9 Sale of residential property.
(a) Losses not allowed. A loss sustained on the sale of residential property purchased or constructed by the taxpayer for use as his personal residence and so used by him up to the time of the sale is not deductible under section 165(a).

(b) Property converted from personal use.

(1) If property purchased or constructed by the taxpayer for use as his personal residence is, prior to its sale, rented or otherwise appropriated to income-producing purposes and is used for such purposes up to the time of its sale, a loss sustained on the sale of the property shall be allowed as a deduction under section 165(a).

(2) The loss allowed under this paragraph upon the sale of the property shall be the excess of the adjusted basis prescribed in § 1.1011-1 for determining loss over the amount realized from the sale. For this purpose, the adjusted basis for determining loss shall be the lesser of either of the following amounts, adjusted as prescribed in § 1.1011-1 for the period subsequent to the conversion of the property to income-producing purposes:

(i) The fair market value of the property at the time of conversion, or

(ii) The adjusted basis for loss, at the time of conversion, determined under § 1.1011-1 but without reference to the fair market value.


In (a), does not deductible under 165(a) apply if the taxpayer is a corporation?
Someone help me with (b). How does it get applied in OP's facts?
 

#8
CP Hay  
Posts:
226
Joined:
3-Apr-2019 5:24pm
Location:
NEW YORK (NY)
Also, is there no threshold? Doesn’t seem logical to depreciate items over several years when their value when contributes to the corp is minimal (I.e. a few hundred bucks)

Any thoughts?
 

#9
Nilodop  
Posts:
18751
Joined:
21-Apr-2014 9:28am
Location:
Pennsylvania
Now you tell us?
 

#10
CP Hay  
Posts:
226
Joined:
3-Apr-2019 5:24pm
Location:
NEW YORK (NY)
The cost of some of the equipment contributed were significant and some were not.
 

#11
Posts:
1716
Joined:
28-Jul-2017 12:08pm
Location:
Somewhere out there...
Sec 358(a)(1)(A) - basis = basis in hands of transferor, reduced by loss recognized on transfer ($0, per sec 351)
 

#12
CP Hay  
Posts:
226
Joined:
3-Apr-2019 5:24pm
Location:
NEW YORK (NY)
Just seems odd to depreciate something contributed to a business that's only worth $100 (or less).
 

#13
Nilodop  
Posts:
18751
Joined:
21-Apr-2014 9:28am
Location:
Pennsylvania
As a practical matter, who cares? But a law is a law, a reg. is a reg.

Reg. 1.263(a)-1 has de minimis exceptions/safe harbors, but they all use the word "paid" and typically we don't see a capital contribution as a payment. But wait! Reg. 1.263(a)-1(d)(6) might open a tiny sliver of authority, albeit you'd need to open your mind to the reasoning. There are 7 examples of capital expenditures, and 6 of the 7 refer to amounts "paid". But one says
voluntary contributions by shareholders to the capital of the corporation for any corporate purpose. See section 118 and § 1.118-1.
. I gather yours is under 351, not 118, but I'd use it anyway to interpret it as including both, which means, if you meet the other rules for safe harbor, you'd deduct the $100.

Now that I read OP again, I'm not sure whether 351 or 118 applies here.
Last edited by Nilodop on 3-Feb-2021 8:17pm, edited 1 time in total.
 

#14
Posts:
1716
Joined:
28-Jul-2017 12:08pm
Location:
Somewhere out there...
Would(n’t) they both apply?

But the tax-free treatment only applies to shareholder contributions.
 

#15
Nilodop  
Posts:
18751
Joined:
21-Apr-2014 9:28am
Location:
Pennsylvania
Not following you here. We don't have the facts to know whether 351 applies. And if it does, it relates to exclusion from income by the person contributing the property. OTOH, 118 applies to exclusion of income by the receiving corporation.

We don't even know whether the contributor is a shareholder. :lol: :? :!: ;)

Has our time spent exceeded the few hundred bucks yet?
 


Return to General Accounting



Who is online

Users browsing this forum: No registered users and 15 guests