Thus, the shareholder would report the ,500 dividend (the fair market value) on his personal return and pay tax a second time.Not only may there be a double tax, the combined tax may be so much that you may create cash flow problems paying the tax.The shareholder's basis in the property is the property distributed is the fair market value. Selling the asset to the other company may not be the answer. Simply transferring the property will generally be deemed to be a dividend (or distribution) from the company to the shareholders followed by a capital contribution to the new company. (That's when the S corporation was a C corporation when the asset was purchased and it appreciated in value.) That's another complex issue.That's an problem if the shareholder wants to use the property in another business. We've also simplified the discussion by ignoring property that's encumbered by a loan.Remember that any distribution will reduce your basis in an S corporation.
This is generally the pre-distribution basis the partner has in their partnership interest. As such, the property distributed to you will have a zero basis.Distributing depreciated property may be worst than distributing appreciated property. Selling the property and distributing the cash may also make sense in the case of appreciated property since you avoid any arguments over the fair market value of the assets and you'll have the cash to pay any taxes. Be sure to explain exactly what you want to do and give him or her all the facts.the value of the distribution or dividend will be the fair market value of the property, but the company will get no benefit for the loss. The tax basis (cost less depreciation) is ,840, but the fair market value is ,000. If your real intention is to transfer property from one entity to another, things can get more complicated. We didn't discuss the problems you might have with an S corporation if there are built-in gains.Turbotax Business shows the property as a net section 1231 loss on each of the 3 partners K1's, although the full basis, adjusted for depreciation, should transfer to me for recording on my 1040.For tax purposes, each partner, except me, has absorbed losses exceeding their investments in prior years.The truck has been depreciated so that is adjusted basis for tax purposes is now ,500. Madison distributes the truck to its sole shareholder.Madison must recognize a ,000 gain (all ordinary income).Instead of paying a dividend (in the case of a C corporation) or a distribution (for an S corporation) in cash, you may be tempted to distribute property (car, computer, etc.) out of the corporation. If an S corporation distributes appreciated property to its shareholders, the difference between the fair market value and the property's basis will result in a gain that will be passed through to the shareholders. (an S corporation) owns a truck that was purchased for ,000. As a shareholder/owner you may think it's your property, but it's not. In addition, a distribution can affect your basis in the corporation.Partnership tax is difficult and liquidating a partnership with property distributions can be even more complicated.In general, you will not recognize a loss on a liquidating distribution UNLESS the distribution consists of ONLY cash, inventory and unrealized receivables (know as hot assets).