Contribution of Equipment to LLC and Sect 179

Forum|Forum|2 years ago
November 14, 2023
2 replies
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Hello,

I have a question about a capital contribution of a piece of equipment to a new 2 member LLC. (a transfer)

I believe I have figured out one thing. Please tell me if I'm right.

That repairs and upgrades done to the 2nd hand piece of equipment while still personal property will add to it's value for the transfer contribution. I assume this would be at Cost not FMV (This piece of equipment has never been used for personal use and was bought as the main piece of equipment to earn revenue in this business)

What I'm less sure about is if, after transferred, would this fixed asset be eligible for section 179? Or does the fact that it is a capital contribution and not a business purchase disqualify it? This is an old piece of equipment thats cost (at most around $20,000 after repairs and upgrades) that I think falls below the allowed threshold for sect 179, and would be taken all in one year if eligible. Our company is seasonal, so I understand that since the company was formed in the last quarter of 2023, that our income may not be enough to take it all, and it might be carried over.

Thank you so much ahead of time for clarification!

Not A Product Question

Best answer by Rick19744

A couple of comments:

Section 179 defines purchase as "....any acquisition of property..."
A contribution of property is not an acquisition of property.
Section 723 states that the basis of contributed property to a partnership by a partner shall be the adjusted basis of such property.
So whatever the adjusted basis is at the time of contribution is what will be depreciated by the partnership; when transferred it is a step-into-the-shoes transaction. Same adjusted basis, same life and method of depreciation.
My comments are assuming that the 2 member LLC will be taxed as a partnership
Also, for future reference, keep in mind that Section 179 has taxable income limitations which can trip up taxpayers. This limitation applies at both the partnership and partner level.

Anonymous_

Employee

See https://www.irs.gov/publications/p946#en_US_2022_publink1000107401

Its basis is determined either:

In whole or in part by its adjusted basis in the hands of the person from whom it was acquired......

Shannon702Author

Thank you for that info!

So, how I read this is, because the company did not purchase it, and because it was a contribution by one of it's owners, (related person) it is disqualified for any type of deduction on taxes.

I appreciate your fast response!

Anonymous_

Employee

I'll page @Rick19744 but I believe the property would qualify, other than for Section 179, on the adjusted basis that is carried over to the partnership via the contribution thereto.

Rick19744Answer

Employee

A couple of comments:

Section 179 defines purchase as "....any acquisition of property..."
A contribution of property is not an acquisition of property.
Section 723 states that the basis of contributed property to a partnership by a partner shall be the adjusted basis of such property.
So whatever the adjusted basis is at the time of contribution is what will be depreciated by the partnership; when transferred it is a step-into-the-shoes transaction. Same adjusted basis, same life and method of depreciation.
My comments are assuming that the 2 member LLC will be taxed as a partnership
Also, for future reference, keep in mind that Section 179 has taxable income limitations which can trip up taxpayers. This limitation applies at both the partnership and partner level.

*A reminder that posts in a forum such as this do not constitute tax advice.Also keep in mind the date of replies, as tax law changes.

Shannon702Author

I really appreciate your response.

So sorry I didn't see it yesterday. Didn't realize I was having phone issues till just now 😞

I was hoping to have a clear grasp on this subject, but I'm realizing that I will definitely be getting extra tax help on our taxes this year. Maybe I can learn enough for next year!

Thank you for the info!