Where Form 1120 C Excess 2023-2024

Hello and welcome to chapter 18. This is Professor Farhad. In this session, we will look at the shareholder basis and the corporate basis during the corporate formation. So basically, when we form a new corporation, the new shareholder will contribute assets. The question is, what is the shareholder basis and what is the corporation's basis? Before we proceed in this session, you want to make sure you understand how we deal with assumption of liabilities. In other words, the shareholder might also contribute liabilities. So if you have any questions about how liabilities are treated, please view the previous recording where we discuss assumptions of liabilities. Now, let me make you aware of a few things about liabilities. Liabilities are not treated as good for gain unless there is no business purpose for the liability. If there is no business purpose, the entire amount of liability contributed is considered a loss. If there is a business purpose, the liabilities in excess of the basis transfer will be considered a gain. To simplify, let's consider an example. If we contribute an asset worth $100,000 and there is a liability of $150,000, and it is for a business purpose, we have an excess of $50,000. Now, let's go to an excel sheet and start with a simpler example. If we contributed an asset with a tax basis of $35,000 and a piece of equipment with a liability attached to it for $15,000 (assuming it was incurred for a business purpose), the basis for the shareholder is $20,000. Using the same example, let's assume the asset is $35,000 and the liability, which is also for a business purpose, is $45,000. In this case, we have a negative basis, which is not possible. So the excess of $10,000 is considered a gain, and the basis becomes zero. Remember,...