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Lev
Lev, Tax Advisor
Category: Tax
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Experience:  Taxes, Immigration, Labor Relations
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In 2012 I converted my small business from a sole proprietorship

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In 2012 I converted my small business from a sole proprietorship to a C-corp. In exchange for 100% of the common stock of the corporation, I provided cash as well as personal capital assets -- equipment from the sole proprietorship which was not fully depreciated.

I am just now completing tax returns for 2012 for myself and the corporation. How do I account for this in my books and how do I maximize tax savings on my 1040? The corp did not turn a significant profit last year so I would rather shift any savings to my personal return if possible.

Thanks you.

Lev :

Hi and welcome to our site!
You will need to have two sets of books - for your sole proprietorship and for C-corporation.
Correspondingly - you will report all income and expenses on schedule C up to the date of conversion. That includes depreciation of assets.
Disposition of business assets via contribution to your C-corporation is not taxable event. Thus you do not report that contribution as a "sale" on your tax return. However - you need to be clear on establishing a tax basis for your C-corporation shares - that includes adjusted basis of your assets and additional money your contributed.
You will continue depreciation schedule for assets as before conversion - this - nothing changes regarding depreciable assets.

Lev :

Because C-corporation is a separate entity - all income and expenses AFTER conversion are reported on corporate income tax return - form 1120.
Generally - your personal income from the corporation is coming in two ways - wages paid to you as an employee and dividends paid to you as a shareholder.
As the C-corporation had relatively small income - you might want to delay wage payments - so there will not be employment tax returns - and you will have a little overhead saving.

Customer:

Hi Lev. Thanks for the response.

Customer:

So I will bring all of the assets across with the same depreciated value as in my personal books?

Lev :

Corporate will pay income taxes on their net income - mainly at 25% rate plus state taxes.
The corporate may reimburse you for business related expenses - because you are an employee of that C-corporation - for instance - if you used your car fro business purposes, your phone, etc.
These are deductible expenses for the corporation and are not taxable for you if reimbursed under accountable reimbursement plan.

Customer:

I've never owned any type of stock before. Do I need to show the exchange on my 1040?

Lev :

So I will bring all of the assets across with the same depreciated value as in my personal books?
Yes - you will transfer all depreciation schedules - and will continue depreciation as before conversion.

Lev :

I've never owned any type of stock before. Do I need to show the exchange on my 1040?
What you need to do - establish your basis in shares. That is not reported on 1040 because there is no income items.
You will use the basis when you sell shares or liquidate the corporation in future - at that point you will report on 1040 as will calculate your gain.
But at the starting point - nothing is reported on your tax return.

Customer:

I understand, thank you. I read somewhere that basis may be assessed based on annual profit. We are a service company so we have low assets compared to our annual profit. Should I still use assets as basis?

Lev :

Your basis in shares - your original contribution - includes assets and money. If you will make additional contributions - your basis will increase.
If you will take non dividend distributions from C-corporation - your basis will decrease - but not below zero.

Customer:

I see. Thank you for the help.

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