Lesson 4.3.1 Capital Contributions: Concepts

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Из курса от партнера University of Illinois at Urbana-Champaign

Taxation of Business Entities I: Corporations

22 оценки

University of Illinois at Urbana-Champaign

Taxation of Business Entities I: Corporations

22 оценки

Курс 3 из 5 — Specialization U.S. Federal Taxation

This course provides an introduction to the U.S. federal income taxation of corporations and their shareholders. The course focuses on the relevant provisions of Subchapter C of the Internal Revenue Code, as well as related Treasury Regulations and judicial opinions, governing corporate formation, operations, distributions, and liquidation. Practical in-class study problems facilitate self-discovery of technical tax knowledge along with the development of a variety of professional skills and attitudes.

Из урока

Module 4: Corporate Formation II

In this module, you will continue to explore property-for-stock transactions. Assumption of liabilities and transfer of services along with property will be introduced. Next, you will examine the effects of capital contributions on corporations, shareholders, and non-shareholders. You will also analyze the rules for debt and equity regarding capital structure. Finally, investor losses due to worthlessness of debt/equity investments and bad debts will be discussed.

Lesson 4.3.1 Capital Contributions: Concepts3:59

Lesson 4.3.2 Capital Contributions: Applications2:07

Познакомьтесь с преподавателями

Michael P Donohoe, PhD, CPA
Associate Professor of Accountancy and PwC Faculty Fellow
Department of Accountancy, Gies College of Business

The last several lessons have focused on property for stock transfers.

That is, a shareholder transfers property to

a corporation in exchange for stock in such corporation.

In this lesson, you will learn about another type of

property transfer, capital contributions.

The key distinction here is that the transferer does

not receive anything in return from the corporation.

More specifically, this lesson considers the effects of capital contributions on

the corporation and the transfer which may or may not be an existing shareholder.

As usual, after learning these new concepts,

you will apply them to Sunchaser Shakery.

A capital contribution is a transfer of property by a person,

which may or may not be a current shareholder,

to a corporation for which no stock or property is received in return.

Code section 118(a) provides that a corporation does not include in gross income

any contributions of money or property from

shareholders to the capital of the corporation.

In other words, the corporation receiving

a capital contribution from a shareholder does not recognize

any income or gain on the transfer of property because

the transaction is not a sale of services, inventory, or property.

This tax-free treatment applies despite the fact

there is no change in the outstanding shares of stock.

Contributions of capital by non-shareholders however,

received special treatment depending on whether

the contribution occurred in a tax year beginning before or after

the enactment of the Tax Cuts and Jobs Act of

2017 and particular for tax years beginning after 2017,

capital contributions of property by

non-shareholder are included in a corporation's gross income.

Why? Can you think of a situation where a non-shareholder will

voluntarily transfer property to a corporation for nothing in return?

I mean, are you willing to transfer your home or car to Google for nothing? Probably not.

The scenario commonly arises when a governmental entity such as a municipality,

transfers real estate to a corporation to induce

the corporation to locate its operations within its border.

As such, the code now subjects this transaction to taxation.

Before 2018 however, such contributions were excluded from gross income.

So, be sure to pay attention to tax your timing in this situation.

If cash or other properties contributed by an existing shareholder,

the corporation receives a carryover exchange basis in the property.

This is the same basis treatment as in

most other non-recognition transactions such as Section 1032.

This treatment applies both before and after the Tax Cuts and Jobs Act.

However, if non-cash property is contributed by a non-shareholder after 2017,

the corporation receives a basis equal to

the property's fair market value as it is a taxable transaction.

Before 2018, the corporation generally receives a basis of zero in the property.

A common exception however,

occurs if non-shareholder contributes cash

which has a tax basis and cannot be zero by definition.

In such cases the corporation reduces its basis and

other property it already owns by the amount of cash received.

For contributing shareholders, a capital contribution is not

a taxable event because nothing is received in return,

instead shareholders increase their basis and

any existing stock by the basis of the property contributed.

For non shareholder transfers like the local government mentioned in the example earlier,

special rules beyond the scope of this course generally apply.

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