Contribution of vehicle to s-corp

[mbigelow]

Can a >2% shareholder contribute a vehicle to his s-corporation and increase his basis by the lower of FMV or adjusted basis? Or does the vehicle need be sold to the S-corp? In either case, I know the vehicle would have to be retitled to the S-corp with all the attendant complications, but just wondering if the former is even a possibility. BTW, this is NOT a new corporation, but one that's existed for several years. Thanks in advance!

[Roland Slugg]

He can certainly sell the vehicle to the corp, at its FMV. In this instance, the seller would recognize taxable gain only if the amount received from the sale exceeds his basis. If the sale includes an assumption by the corp of a liability on the vehicle, the seller would recognize gain to the extent the cash received plus the liability assumed exceeds his basis. Assuming the vehicle was a personal asset in the hands of the seller, no loss would be recognized on its sale. The basis of the vehicle in the hands of the corporation would be the amount of cash paid plus any liability assumed, but not more than the vehicle's FMV at the time of the sale.

You stated that the shareholder owns >2% of the shares of the corp but didn't say how much, exactly. If his ownership is 80% or more, then he can transfer the vehicle to the corp tax-free, under Code §351, in exchange for the corp's stock or an increase in the basis of his existing stock. The basis in the hands of the corp would be the lower of the transferor's basis in the vehicle or its FMV at the time. Liabilities assumed affect the basis similar to a sale.

Finally, if the shareholder owns less than 80% of the corp's stock, any property transferred by him to the corp in exchange for stock would be a taxable event, based on the FMV of shares received in excess of his basis in the property transferred. Again, if the asset transferred is a personal vehicle in his hands, no loss would be recognized.

You may wish to read the relevant portions of Code §351 and §362.

[mbigelow]

Thank you, Slugg, for a most thorough response. He's a 90% owner, so he has the 351 option you mentioned. Seems like the 351 transfer would yield a similar result as the sale but with less hassle (and no sales tax issues). In either case, then, I believe the corporation can take advantage of a depreciation deduction on the vehicle. I will take your advice and review code sections 351 and 362.