How is equipment valued as a capital contribution to a new company?
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  1. #1
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    Default How is equipment valued as a capital contribution to a new company?

    If I am forming a company with other people and use custom-built machines as part of my equity contribution, how are those machines valued? Can we just assign whatever value we want? This has implications for taxes.

    For example, let's say I contribute a bunch of machines and software that I built and we value the machines at $1 million. If I later sell my shares in the company for $2 million, then my basis I assume is $1 million so my capital gain is $1 million, but if we value the machines initially at $1.5 million, then my capital gain is only $500,000.

    Does anybody know what the rules are for this?

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    Time to call an accountant.

    Having said that, the tax man (or gestapo as the case may be) is a sharp cookie and I would bet sees that one coming a mile away in each of our jurisdictions. Here, you can put it in for anything you like, but if its more than you paid for it you trigger a capital gain. Safest is FMV, if its millions get an equipment appraisal, if small, put some comparables in the file.

    i wouldn't sell it for shares, I'd put it in as a shareholder loan - that way you can take it back out without paying personal tax (the company however will pay tax). Gives you more flexibility. If the business is sold, one of the terms of sale is the shareholder is paid out on closings. But there are lots of other considerations and factors that might make a different direction more sensible.....so, time to call your accountant

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    Quote Originally Posted by jscpm View Post
    If I am forming a company with other people
    I would just stop RIGHT THERE.. Back out and go buy a hot dog cart.

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    Quote Originally Posted by jscpm View Post
    If I am forming a company with other people and use custom-built machines as part of my equity contribution, how are those machines valued? Can we just assign whatever value we want? This has implications for taxes.

    For example, let's say I contribute a bunch of machines and software that I built and we value the machines at $1 million. If I later sell my shares in the company for $2 million, then my basis I assume is $1 million so my capital gain is $1 million, but if we value the machines initially at $1.5 million, then my capital gain is only $500,000.

    Does anybody know what the rules are for this?
    The part you are missing that property contributions have both a fair market value and basis (what you spent to produce or acquire the property).

    FMV will influence your % share of the business.

    The basis is what influences your capital gains. You can only reduce earnings to the extent that you have basis.

    In one sense the FMV will be determined by how much stock the cash contributors are will to give you for your contribution. The FMV needs to be supported and justifiable though. Opposite of what you propose, the IRS cares if you are "underpaid" with your stock allocation because the other stock holders are effectively getting paid in that transaction.

    If you are digging into these things you should really develop a good understanding of the interplay between owner stock, basis, and distribution of income/losses. If you are really talking millions, learn enough to move through the process efficiently with a competent lawyer (and not some guy on a machining forum). With the sort of contribution considering you should really have a lawyer that represent YOUR interest and is separate from the lawyer structuring the company.

    Depending on your personal financial situation and nature of the new company there a bunch of different ways to structure your contribution selling for debt or a leasing arrangement. These approaches may reduce the chances of you loosing control of your equipment, but they need to be structures properly to not reduce value of the main business.

    If you will have income from other sources while starting a new business, you may favor approaches that reduce your current tax burden.

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    If you are talking about a million dollars then you certainly have a CPA. Talk to them not us.


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