Transferring Property Into a Corporation

Caution!

When setting up a corporation, make sure all property to be used in the corporation has been legally transferred into the corporate name before commencing operations.

Here's why:

Noncorporate property involved in a legal claim may not be covered by corporate liability insurance. For example, say you contribute a piece of equipment to the corporation that you had previously used in your sole proprietorship. You fail to transfer the equipment into the corporation's name. Then, someone gets hurt using the equipment and sues the corporation.

Since the equipment was not legally owned by the corporation, it is possible for the insurance company to deny the claim. Check with your insurance carrier.

Documents Used to Transfer Property

Once the corporation is formed, property may be transferred into it in exchange for its stock.

There are a variety of documents used to legally transfer property from one person to another or to a corporation (an artificial person):

Bill of Sale:

This is used to transfer most anything, except:

  • Real estate
  • Cars
  • Leases
  • Contract rights

Title Transfer Documents:

To transfer a vehicle to a corporation follow the procedures prescribed by the state where the vehicle is registered.

You will normally have to fill out the back of the Certificate of Title, have it notarized, surrender it to the new owner (the corporation), then, a new Certificate of Title must be obtained in the corporate name.

Assignments:

You can use an Assignment of Lease form to transfer ownership rights in a lease. Attach copies of contracts as exhibits to the Assignment.

Deeds:

Deeds are used to transfer rights in real property (real estate). Check if your state requires an Affidavit of Property Value to be filed along with the deed. Your County Recorders office handles this.

Leasing and Licensing Property to a Corporation:

Property you own may be leased to your corporation. You may also license patents and rights to copyrighted works. A lease and licensing agreement must be prepared and signed by the appropriate parties.

Opening a Corporate Bank Account:

You should open at least two corporate accounts:

  • A General Account:
    • Used for paying everything, except payroll.
  • A Payroll Account:
    • Whether you do your own payroll or use a payroll service, you need to set up a separate payroll account. Payroll checks will be drawn on this account. Like any banck account, the payroll account should be reconciled monthly.

A bank will generally need copies of certain documents to open corporate bank accounts, such as:

  • Articles of Incorporation (approved by the state).
  • A completed copy of Form SS-4, Application for Employer Identification Number. If the bank doesn't need this form, it will still need the corporation's Employer Identification Number.
  • Certified Copy of Resolution. This is the corporate authorization to open the accounts. It indicates who is authorized to sign checks and other information. The bank will provide signature cards for authorized signers.

Incorporation Kits

Incorporation kits have all the forms you'll need to transfer property, open bank accounts, and to properly administer the affairs of the corporation. Even stock certificates are generally included.

Valuation of Property Transferred into the Corporation

Once the corporation has been formed and you have all the documents you need to execute the legal transfer of property into the corporation, the next issue is the valuation of the property included in the exchange.

In tax terminology, the value of property is referred to as basis. Your basis is the amount of your investment in property for tax purposes. Use the basis to figure the gain or loss on the sale, exchange, or other disposition of property. Also use it to figure deductions for depreciation, amortization, depletion, and casualty losses.

The original basis in property is usually its cost. The original basis is subsequently adjusted (increased or decreased) by certain items. For example, making an improvement to the property increases basis and claiming deprecation or casualty losses reduces basis.

Property Records

Accurate records must be kept and retained for property until at least three years after the property is disposed of.

Tax Terms You Should Know When Discussing Property Valuation

Unadjusted Basis:

This is the starting point for valuing property. This is your original cost, or simply, your basis.

It includes:

  • Cash paid for the property.
  • The fair market value of property you gave up to acquire the property.
  • Liabilities assumed by you from the seller.
  • Taxes you paid, such as sales tax.
  • Shipping costs, including insurance you paid.
  • Installation costs to put the property in service.
  • Costs to test the equipment.
  • Any other costs associated with the initial purchase.

Adjusted Basis:

Once the unadjusted basis is established, it may be revised upward or downward for certain items after the date of the original purchase.

This revised basis is called your - adjusted basis.

  • Items that increase basis:
    • Capital expenditures are costs that increase basis and are added to the original basis and are also depreciated.
      • They include:
        • The cost of improvements or additions to extend the life of property or make it more productive. For example, installing a new motor in a vehicle, or a new roof on a building.
        • Legal fees to acquire property or defend title to property..
        • Selling expenses, such as broker's fees or advertising costs to sell property.

NOTE: Costs for normal repairs and maintenance to keep property in good operating condition do not increase basis  (e.g., oil changes, tune ups, etc.). They are ordinary and necessary expenses, and are deducted in full in the year incurred (if you're using the accrual method) or in the year actually paid (if you're using the cash method of accounting).

  • Items that decrease basis include:
    • Depreciation. Keep in mind, whether you actually claim depreciation or not, basis is still reduced by the amount you could have claimed.
    • Section 179 deduction (also called the first-year expensing deduction).
    • Depletion allowances for certain natural resources.
    • Amortization.
    • Casualty losses that have been deducted.
    • Return of capital. For example, dividend payments received by a stock holder that were paid out of corporate capital rather than out of its earnings.

Example of unadjusted basis and adjusted basis:

In 2015 you paid $5,900 for a machine. The total cost was made up of the following items:

  • $5,000 for a machine
  • $300 sales tax
  • $400 shipping costs
  • $200 installation costs

In 2015 you claim the Section 179 deduction for the entire cost of the machine, $5,900.

  • Your unadjusted basis is $5,900 (cost of machine, $5,000 plus related costs of $900)
  • Your adjusted basis is zero (total cost $5,900 minus the $5,900 Section 179 deduction)

Form 8824

When doing an exchange, the computation of basis is done on Form 8824.

Fair Market Value

The fair market value of an item is the price agreed upon by a willing buyer and seller, both having knowledge of all material facts of the transaction.

When price is determined by parties having adverse interests (an arms-length transaction), this is a good indication of the fair market value.

To find the fair market value of property you intend to transfer to your business, check a variety of sources: eBay, Kelly Blue Book, classifieds, etc.


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