Example #1. The computer was my personal property. (That is, I did not use it as business property, and did not take any depreciation of it.) I bought the computer for $2000, which includes purchase costs for shipping and tax. My adjusted basis in the computer is as follows:
$2,000 Original Cost
+$0 Improvements
+$0 Purchase costs (shipping & tax already included in purchase price)
+$0 Selling costs
-$0 Depreciation (I did not depreciate the computer for personal use)
=$2,000 Adjusted Basis
So, I have an adjusted basis of $2,000 in my computer. Next, I need to find out the fair market value (FMV) of my computer. This is a bit harder to do. I check various web sites for buying used computers (ebay, craigslist, and so forth). I find out that my computer model, in good condition, is selling for around $1,500. If I were to try to sell my computer this way, I could expect to get $1,500, more or less. This is the FMV of my computer.
So, when I donate my computer to my S-Corp, the computer is valued at the lesser of its adjusted basis or fair market value. In Example #1, the value of the computer is $1,500, because that is the smaller of the two figures. My capital account is increased by $1,500, and the corporation can use $1,500 as its basis for depreciating the computer.
Example #2. The computer was my business property. (That is, I used the computer as an independent contractor, and I depreciated the computer on my Schedule C.) I bought the computer for $2,000, which includes purchases costs for shipping and tax. I bought the computer in June 2003, and took depreciation for the computer on my 2003 Schedule C. Instead of taking normal depreciation using MACRS, I opted to take a full Section 179 deduction for the full cost of my computer. My adjusted basis in the computer is as follows:
$2,000 Original Cost
+$0 Improvements
+$0 Purchase costs (shipping & tax already included in purchase price)
+$0 Selling costs
-$2000 Depreciation (Section 179 depreciation taken in 2003)
=$0 Adjusted Basis
The Fair Market Value of the computer, just like in Example 1, is $1,500. The lesser of the two figures is $0. So, unfortunately, my computer is valued at $0. My capital account is increased by $0, and the corporation cannot depreciate the computer, because the corporation's basis in the computer is also $0.
Now, if the S-Corp were to go out on the marketplace and buy a similar computer for $1,500, then the company can depreciate the computer. That's because the company has a verifiable basis in the computer, namely its purchase price. The company could choose to buy the computer from you, but that will have two impacts on your personal taxes: 1) your capital account would not increase or decrease, because you have not donated the property to the company; and 2) you would have to report ordinary gain (Form 4797) on the sale of business property. You would have gain to report, because you already reduced your adjusted basis in the property to zero by using Section 179. If the company pays you $1,500 for your computer, you would have $1,500 of ordinary gain, taxed at your ordinary tax rates (not capital gains tax rates).
So, this has been a LONG answer to your question. I am sorry. But sometimes you have to see how the same transaction (donating property to a corporation) can be handled in a number of different ways. The SHORT answer to your question is this. If you have expensed the full cost of your business property using Section 179 when you had your Schedule C, your adjusted basis in the property is zero. When you convert your business property to an S-Corp, the S-Corp inherits your adjusted basis, which is still zero.
