Red, Andy, and Brooks decide to go into business together. They are considering

Question

Red, Andy, and Brooks decide to go into business together. They are considering conducting the business through a C corporation, an S corporation, or a partnership.

Red is going to make a contribution of cash of $100 for a 40% interest in the business. Andy is going to contribute equipment with a fair market value of $100 and a tax basis of $60 for a 40% interest in the business. The equipment currently is not subject to any debt. Brooks is going to provide services worth $50 in exchange for a 20% interest in the business.   

Analyze the following questions based on each type of entity (C corporation, S corporation, and Partnership).

3. Assume again that all individuals contribute the cash, property, or services to the respective entity at the same time. But the equipment contributed by Andy has a fair market value of $120 and is subject to $20 nonrecourse debt that the entity will assume. How does this affect each individual’s basis in their interest in the entity?

Explanation / Answer

1.C corporation :

   Basis of assets for shareholders :

   Red              = Cash $ 100

   Andy             = Equipment adjusted basis or tax bais $60

   Brooke          = $50 for services

   Basis for C Corporation :

   Cash $100

   Equipment tax basis $ 60

S corporation : Same treatment as that of C corporation

Partnership :

Basis of assets to partners

Red                  = Cash $100

Andy                = equipment $60

Brook               = $50 for services

Carry over basis to partnership entity :

Cash             = $100

Equipment     = $60

2. Suppose equipment supplied by Andy has fair market value $ 120 and is subject to $20 non recourse debt assumed by the entity.

C corporation :

     Shareholders basis:

     Red            = Cash $100

     Andy           = Equipment $60 - $20 nonrecourse debt

    Carry over basis to C Corporation :

    Cash               = $100

    Equipment      = $60

   S Corporation: Same consequencies occur in case S corporation as that of C corporation

Partnership:

Basis for partners :

Red                 = Cash $100 + $8 non recourse debt (for 40% interest)

Andy                = Equipment $60 + $8 nonrecourse debt (for 40% interest)

Brook               = $50

Carry over basis to an entity :

Cash        = $100

Equipment = $60

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