S corporation contributed assets bonus depreciation

[Avs19]

Hi,

A client of mine formed an s-corp and purchased a business's assets last year for $800,000. $600,000 for intagible property and $200,000 in furnature and equipment. He took a loan out for $400,000 and paid the other $400,000 directly from his personal account. If we take the 200K as bonus depreciation, the company will generate a 200K net loss which he'd like to take on his 1040 against other income. I have 2 concerns with this:

1. If we say that he contributed the 200K in furniture and equipment to the s corp, can he take 200K in bonus depreciation? I'm reading that used property qualifies but the property cannot have been used by the taxpayer or a predecessor at any time prior to such acquisition. Being that the predecessor used the propery in a prior business, I'm not sure if this will work?

2. Would it be better to contribute the property to the s corp to create basis or have the owner draft a loan from owner to the s corp as of 12/31/2021 to create debt basis?

Thanks!

[dkh]

Why would there be a $200k loss  - wasn't there any other activity in this business - had sales, paid wages to the shareholder,  other operating expenses  ?

[Avs19]

There was an additional 61k loss. Just using whole numbers to simplyfy things. The business started in November. Only 2 months of income with a lot of expenses.

[dkh]

that used property qualifies but the property cannot have been used by the taxpayer or a predecessor at any time prior to such acquisition.        then only new property would qualify based on this......

I believe TCJA  removed the requirement that property must be new to qualify for Bonus depreciation

[Avs19]

If I'm reading it correctly, this is what it's still saying under TCJA rules

https://www.irs.gov/newsroom/additional-first-year-depreciation-deduction-bonus-faq

[Avs19]

In this situation, do you think it would be better to have the client contribute the property at it's 200K FMV or draft up a loan from the owner to the company for the 400K that was paid from personal funds?

[dkh · Accepted solution]

I don't believe the person the client purchased the property from qualifies as a "predecessor".   If that was the case, then used property would never qualify for bonus depreciation because there would always be a predecessor.        

To take the $200k loss there must be basis, either scenario gives the client basis.  So six of one, half a dozen of the other for which way to create the basis.     Does the client expect the corporation to pay back the $400k when profits allow? 

[Avs19]

Probably not. But if they do, I'm thinking a transfor of assets would make more sense in the long run

[ljr]

He has the basis but I'm just wondering if taking the Bonus depreciation for such a large loss when the corp was only in existence 2 months and already has a 61K loss is the best option. Would taking the furniture over what 5 or 7 years be more beneficial for years when he should be generating a profit to lower income in future years?

[Avs19]

I would be much more comfortable doing it that way but he has a 500K capital gain in 2021 from selling shares in another business he was a part of and could use the tax savings to help with the new business.