Merging Business Question

[cynamoats]

Two S corporations decided to form a new corporation. One S corp brought into the new business assets fully depreciated through Sec 179 and bonus depreciation but also almost $ 140,000 worth of debt on fully depreciated assets. I've always booked assets at FMV (Cost less depreciated taken) yet in the above case there is no basis available. Any advise as to what the debit should be in this situation? I am thinking the one shareholder's distribution OR Officer Receivable ..... or am I way off base? This individual received the benefit of all of the depreciation on the assets. Another question. Do I book the assets at this point? How can I when there is no value left? Maybe this isn't the place to post such a message. If not, does anyone know of a professional accountant's board? Thank you.

[Unregistered]

hmmm...original entries something like:
140K...debit assets
140K credit loans outstanding

140K credit...accum depreciation
140k...debit depr expense

therefore expense entry is ultimately closed
to net income/loss and on to
retained earnings ultimately.

not sure why you can't just combine the original 2 bal sheets
assets plus assets/liab plus liab/cap plus cap

individual basis in new co calculated individually

[cynamoats]

Merging into new business

Thank you for your response ...

I understand what you are saying however, the expenses were closed out to Retained Earnings on the original 1020S Corporate returns. The new company cannot take on the retained earning amounts of the two original companies and have that be the problem debit entry.

[JON]

????

If you want a tax free on the merger you do not get a step up. Any step in assets results in taxable event and income to the contributing party. I do not think there is any reprg that would be tax free and you get deductions for the second time in a new enity. If so we all should be doing that for our clients often.

[cynamoats]

Merging of businesses

Jon,

I hope you are saying the same thing I am. I am the one who feels that the assets have no value because all of the depreciation has been taken and benefited one of the previous owners from a tax standpoint. The question becomes how do I treat the debit when there is almost $140,000 debt being brought into the new business and the assets have no FMV.

I hope you did not think I was looking at this problem as a way to have a tax free event to any of the parties but rather I was asking for some brainstorming from other professionals on how them might handle this particular situation.

Thank you for your time in responding.

[JON]

Merger

I think mergers are tax free if done per regs-I think you end up with the old pooling of interests tor tax purposes. I have only dissolved commonly owned S Corps into one and it required some regulations noted. Yours has to have a code section, but if one surrenders stock for stock in the other I would think the information is just combined including the equity section, but you need to look at merger/reorg sections to get the how to..

[cynamoats]

I think I finally understand. I asked the wrong question or rather explained the situation incorrectly.

Two individuals each owned their own business and then started another that they are starting together. Each individual is bringing over assets to the new company. I am trying to figure out the right way to do this as it seems that we have separate transactions occuring in each business to form the new.

No one can seem to confirm the fact that if assets have been fully depreciated how can one bring them over into a new company? The benefit of the tax deduction has already occurred? One once and seem to confirm that there is not carrying over of Retained Earnings from two businesses. THis is a new business and I thought retained earnings will not occur until after the first year of operation

[Gretel]

Just a little thought coming from logic. No knowledge of any merging.

If you have assets and no liabilties you have positive owners equity.

If you have liabilities and no assets for tax purposes then you must have negative equity.

It would be the same if a sole prorietor transfers assets into a newly started business, which have previously (former business) fully depreciated but still have liabilties attached.

[cynamoats]

Yes my thoughts exactly. But what equity account gets the negative entry?

[JON]

351 Sch C not the same

If you transfer liabilities in excess of assets in a 351 you do have a taxable event. The IRC is 359(?) says that. Taxable to the transferor.. That can be a problem-attorneys never ask the right questions. Sometimes LLCs have to be used.

[OldJack]

Two individuals each owned their own business and then started another that they are starting together. Each individual is bringing over assets to the new company. I am trying to figure out the right way to do this as it seems that we have separate transactions occuring in each business to form the new.

It sounds like not all assets (cash?,etc) of the two S-corps are being merged into the new business. If that is the case there isn't really a merger but a sale of equipment at FMV (and taxable gain) from the old S-corp to the new S-corp and therefore you do have a new FMV basis with the debt.