This section explains the tax treatment of contributions from shareholders and nonshareholders.taxmap/pubs/p542-002.htm#TXMP4eb08bc6
Contributions to the capital of a corporation, whether or not by shareholders, are paid-in capital. These contributions are not taxable to the corporation.taxmap/pubs/p542-002.htm#TXMP57c9982c
The corporation's basis of property contributed to capital by a shareholder is the same as the basis the shareholder had in the property, increased by any gain the shareholder recognized on the exchange. However, the increase for the gain recognized may be limited. For more information, see Basis of property transferred, earlier, and section 362 of the Internal Revenue Code.
The basis of property contributed to capital by a person other than a shareholder is zero.
If a corporation receives a cash contribution from a person other than a shareholder, the corporation must reduce the basis of any property acquired with the contribution during the 12-month period beginning on the day it received the contribution by the amount of the contribution. If the amount contributed is more than the cost of the property acquired, then reduce, but not below zero, the basis of the other properties held by the corporation on the last day of the 12-month period in the following order.
- Depreciable property.
- Amortizable property.
- Property subject to cost depletion but not to percentage depletion.
- All other remaining properties.
Reduce the basis of property in each category to zero before going on to the next category.
There may be more than one piece of property in each category. Base the reduction of the basis of each property on the following ratio:
| ||Basis of each piece of property|
| ||Bases of all properties (within that category)|
If the corporation wishes to make this adjustment in some other way, it must get IRS approval. The corporation files a request for approval with its income tax return for the tax year in which it receives the contribution.