Sec/ 351 transfer to Corporation

[Gretel]

My client wants to transfer his tools to his corporation. Never done that. I think since the FMV of them is much lower than his basis in the tools it would be better to just sell the tools to the corporation. He probably should report on his 1040 and since a loss cannot be claimed this sale will have no tax consequences, right?

All it does is paying the shareholder some cash and having the liability of using the tools in the corporation, right?

[ChEAr$]

My client wants to transfer his tools to his corporation. Never done that. I think since the FMV of them is much lower than his basis in the tools it would be better to just sell the tools to the corporation. He probably should report on his 1040 and since a loss cannot be claimed this sale will have no tax consequences, right?

All it does is paying the shareholder some cash and having the liability of using the tools in the corporation, right?

Right. Just draw up bill of sale for book value of tools. Corporation will then continue
to depreciate them according to previous schedule.

[Gretel]

Right. Just draw up bill of sale for book value of tools. Corporation will then continue
to depreciate them according to previous schedule.

Thanks. The tools were never depreciated before. I thought if this is structured as a sale basis for depreciation is the sales price.

But let's say he does a 351 transfer. Basis for depreciation still would only be FMV, right? Let's say tool new (=basis for s/h) $500, FMV $150. If 351 transfer then $150 would be basis for depreciation?

[Maribeth]

Chances are, if the tools were never depreciated, then they were expensed in a prior year, either on a Schedule C or through the S Corporation. The client's basis is probably zero.

Maribeth

[ChEAr$]

Thanks. The tools were never depreciated before. I thought if this is structured as a sale basis for depreciation is the sales price.

But let's say he does a 351 transfer. Basis for depreciation still would only be FMV, right? Let's say tool new (=basis for s/h) $500, FMV $150. If 351 transfer then $150 would be basis for depreciation?

You say tools never depreciated before? Why kind of tools are these? Work tools used
by the corporation on company business? Were these tools ever taken as a schedule a
deduction?

A 351 transfer I think refers only to initial organization whereby a former proprietor transfers assets. In this case, at a later state, it would be a simply sale at fmv. Then corporation could depreciate tax wise. But make sure first no tax deduction was ever taken for said
tools.

[Gretel]

Thanks, both of you.

Client had good paying W-2 job before, probably never depreciated because of 2% threshold. This brings up the question of allowed or allowable depreciation. Does this apply also to Schedule A deductions (Schedule A might or might not have been used)?

Harlan, are you saying that you cannot transfer personal assets into corporation, or just that this normally isn't done? He already transferred a personal truck to his corporation when he started it.

[ChEAr$]

Thanks, both of you.

Client had good paying W-2 job before, probably never depreciated because of 2% threshold. This brings up the question of allowed or allowable depreciation. Does this apply also to Schedule A deductions (Schedule A might or might not have been used)?

Harlan, are you saying that you cannot transfer personal assets into corporation, or just that this normally isn't done? He already transferred a personal truck to his corporation when he started it.

Legally speaking one may sell any type of assets to another entity. But why would
I sell my personal stereo system and all those 33 1/3 records to my corporation? No
business purpose is served. So yes, normally isn't done.
As for his "personal" truck, was there a business purpose?

I normally advise clients not to transfer personal cars and such into a corporation, but
have the corporation reimburse for business use at mileage rate. After all, once
these vehicles are titled in corporate name, look at the increase in insurance premiums.

However in the case of a plumber who had several special purpose plumbing trucks,
we did transfer those into his S corporation since they are used 100% for business.

As to your first question, if he never deducted those tools on schedule a before, but
now has sold them to the corporation at FMV, the corporation can start depreciating them at that value.

[Gretel]

Legally speaking one may sell any type of assets to another entity. But why would
I sell my personal stereo system and all those 33 1/3 records to my corporation? No
business purpose is served. So yes, normally isn't done.
As for his "personal" truck, was there a business purpose?

I normally advise clients not to transfer personal cars and such into a corporation, but
have the corporation reimburse for business use at mileage rate. After all, once
these vehicles are titled in corporate name, look at the increase in insurance premiums.

However in the case of a plumber who had several special purpose plumbing trucks,
we did transfer those into his S corporation since they are used 100% for business.

As to your first question, if he never deducted those tools on schedule a before, but
now has sold them to the corporation at FMV, the corporation can start depreciating them at that value.

Thanks again, Harlan.

I agree that transfers should only be done if a biz purpose is served...and it is with my client who uses several trucks 100% for his biz of which one was transferred and two are leased to his corporation. I need to ask him why he transferred this one truck. For insurance purpose it doesn't make any sense but I remember him telling me in the beginning that his premiums are the same if personal or corporation.

I will start a new thread on the Schedule A depreciation question.

[JON]

Section 351

is for the tax free transfer of working assets to a corporation. It is at basis unless the FMV is lower. You can use Section 351 at any time it is available-even if it 20 years after you first incorporated.

[ChEAr$]

sale of assets versus contriubting them

is for the tax free transfer of working assets to a corporation. It is at basis unless the FMV is lower. You can use Section 351 at any time it is available-even if it 20 years after you first incorporated.

I was thinking 351 applies to transfer of assets to a corporation for stock and/or
paid in capital. My approach is to keep it simple and merely let stockholder sell
the assets to the corporation, thus realizing some cash in the deal rather than an
offsetting credit to paid in capital.

[JON]

I think I made that

a little quick- I believe the stock ownership %s have to be in line after the transfer. If it is a 100% owned single stockholder my comment works.