Contributing Property to Your
Business
Tax Treatment Varies Depending on the Type of Business
Entity
Regardless if you operate a sole proprietorship,
partnership, or corporation, the nagging question of whether to retitle
and contribute property to the business prevails. The type of business
entity you operate may make a difference in the decision you make. Here
are some points to consider.
If you are operating a sole proprietorship, converting personal property
to business property is a reasonably simple and tax-free event. You do not
necessarily need to retitle the property because a sole proprietorship is
not a separate entity from yourself.
Different rules apply to a contribution of property versus a sale or
exchange of property between a partnership and its partners. A partner
should attach a disclosure statement to his or her return if the partner
contributes property to a partnership and, within two years (before or
after the contribution), the partnership transfers money or other
consideration to the partner.
Property can be contributed to a corporation in exchange for shares in the
corporation. The exchange may have tax consequences to the
shareholder or the corporation. This is a very complex area of tax
law and the shareholder/partner/member and/or the business
should consult a knowledgeable tax advisor prior to making the exchange.
There is one other important tax consequence for
shareholders who contribute property to their corporation. Property such
as real estate may appreciate in value. If it does, the resulting gain
distributed to the shareholders is taxable to them and the
corporation. This is known as double taxation because both the corporation
and the shareholders are taxed on the gain.
