Do I Pay Tax When I Contribute Money or Property to My LLC?
In general, no gain or loss is recognized upon the contribution of money or property to a limited liability company (“LLC”) in exchange for an LLC interest. Neither the contributing member nor the LLC is taxed.
The contributor will receive a basis (the basis play a very important role in accounting for taxable gains) in the cash or property contributed equal to the amount of cash contributed and the basis of the property contributed (including any liabilities associated with the property). In other words, the basis the contributor had in the property contributed becomes the LLC’s basis in the property and the contributor’s basis in the LLC interest granted. Whereas, the contributor’s capital account (the capital account represents the equity that member has in the LLC) will equal the amount of cash contributed and the fair market value of the property contributed to the LLC (net of liabilities).
If a member is providing services to the LLC, the value of the services provided does not constitute a contribution of property for tax purposes. If someone is contributing services to the LLC and not contributing any cash or property to the LLC, that individual will be treated as having a capital account of zero and a basis of zero in his or her interest. In other words, providing services to an LLC will have no impact on the service provider’s capital account or basis in the LLC.
For example: Steve contributes a building to the LLC. The building has a fair market value of $10,000, with a basis to Steve of $6,000. Steve receives a 10% interest in the LLC in exchange for contributing the building. Steve has no gain on the contribution: his basis in his LLC interest is $6,000, and the LLC’s basis in the building is $6,000 (a “carryover basis”). However, Steve’s capital account in the LLC is $10,000 (the fair market value of the building on the date of contribution). Alternatively, if Steve contributed $1,000 in cash to the LLC, Steve’s basis in the LLC Interest he received and his capital account would be $1000.
Contribution of Property with a Built-in-Gain
If a member contributes property to the LLC that has an inherent gain or loss at the time of contribution, this “built in” gain or loss will not be taken into account at the time of contribution. It will be taken into account upon the disposition (sale) of the property (Section 704(c)).
Contribution of Depreciable Property
If a member contributes depreciable property to the LLC, the contributing party is protected from the recognition of gain on the contribution. However, the contributed property remains subject to recapture upon a later disposition by the LLC.