Additional Paid in Capital

[Super Mom]

Is Additional Paid in Capital taxable to the corp or shareholder?

[jaybird]

The shareholder puts THEIR own money into the corp, which has already been taxed. APIC goes up, cash goes up.

Where is the taxable transaction?

[Super Mom]

Makes sense, but I've learned that corporate tax laws usually don't make sense!

[Golden Rocket]

Not Supposed to Be

A general rule is there is not supposed to be gain/loss on capital transactions between a corporation and its shareholders. Anything resulting in plus/minus cost becomes part of basis.

"Additional Paid-in Capital" is a term indicating that an amount was invested in excess of the par value of stock. It is nearly always accommodated in a special account so as not to knock the Capital Stock out-of-synch with investor shares. This "excess" means only that the investor paid more than par value for the stock, it does not mean that any gain or loss has occurred.

Example: A,B,C,D all invest $$ in a corporation. There are 1,000 authorized at a par value of $10.00 per share. Each shareholder, for purposes of this example, invests 250 shares, or 25% ownership.

A, B, &C invest $2500 apiece, or $10/share for 250 shares. D is undecided at first, but several months later decides to put in his money too. However, the other three investors tell him the value of the corporation is significantly higher, and if he wants in, he now has to pay $16 per share, or $4000. So D puts in $4000, but the "par" value is still only $10 per share, or $2500. D's extra $1500 gets credited to this "Additional Paid-in Capital" account, and his $2500 gets credited to the "Capital Stock" Account.

Reason being, the "Capital Stock" account is limited to $10,000, 1000 shares at $10. It also is supposed to reflect actual ownership percentage, and in this case there are 4 owners with 250 shares each. The "Additional Paid-in Capital" is simply to accommodate the additional $1500 from shareholder "D".

The corporation does not record a "Gain" by virtue of receiving the extra $1500. Shareholder "D" does not record a "Loss" by virtue of paying the extra $1500. The extra money is tied up in D's basis. A, B, and C have a basis of $2500 apiece in 250 shares of corporate stock, and D has a basis of $4000 in 250 shares of corporate stock. None of the transactions above have resulted in Gain or Loss to anyone.

[ttbtaxes]

Be careful if it is substantially-appreciated property or if the property's tax basis is less than an debt encumbering it.

In the former case, you need to meet the rules of Section 351 in order for the contribution to capital not to be a taxable transaction. That requires a business purpose and meeting the 80% test. Also, there is an 80% diversification rule that can cause a taxable transaction if the corporation principally consists of investment assets. I've never seen this scenario in real life but the rules exists.

In the latter case, the transferor will likely have income.