Contribution of Equipment to LLC and Sect 179

[Shannon702]

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!

[Anonymous_]

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

Its basis is determined either:

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

[Shannon702]

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_]

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. 

[Shannon702]

Thanks for clarifying. Im a little overwhelmed with accounting courses and tax info right now 🙂

[Rick19744 · Accepted solution]

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.

[Shannon702]

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!

[Shannon702]

And I really appreciate how clearly you explained that! 

[Rick19744]

You are welcome.

[Shannon702]

Hello again @Rick19744 

I think it just occurred to me why this was so confusing to me.

I kept thinking that depreciating the asset over the allowed time in my accounting books was reliant on/connected to being able to take a depreciated deduction on my tax return. (and figuring out depreciation with the deduction formula)

So, am I right in assuming that, even though you may use the same formula for cost basis in both situations, depreciating in my books is not reliant on being able to take a deduction?

And, if you don't mind. One question that I think you would find simple.

How would you determine 'useful life' for a depreciation period on a 30+ year old piece of machinery that runs great and is receiving upgrades? I guess my question is, is 'useful life' (3 or 5 years allowed by IRS) connected at all to the age of the equipment? Or is that just a period of time allowed to take depreciation?

Thank you so much for your help! This question has been driving me crazy. And my research had not been clearing it up before your help!

[Shannon702]

@Rick19744 

I should clarify. I realize I can take depreciation expense per month on books/taxes.

But I was more referring to special deductions like Sect 179 not being related to being able to depreciate in my books. 

Hope that makes sense 🙂 It almost doesn't to me :()

[Rick19744]

Some follow-up comments to your questions:

1. Just keep in mind, that book and tax could have different lives, methods, etc.  When this occurs, there is a book to tax difference recorded on the tax return to account for this; in the Schedule M-1.
2. Since you are most likely not preparing your books in strict accordance with GAAP, it is possible that you may not have any difference between the two depreciation methods. 
3. Useful lives for tax, are determined using an old revenue procedure (Rev Proc 87-56).  You can Google the revenue procedure.  At that point you would look for the appropriate asset class and life.

[Shannon702]

Thank You so much!

I am in an accounting course right now.  And I am using the Accrual method.  Debit, credit, accrue, defer etc, etc :( 

And hoping I will be following GAAP guidelines perfectly! (much sarcasm there)

I am just learning but naturally determined, so we'll see how good I do. 

I really appreciate your help and this info! Info is priceless!