Jeremy operates a business as a sole proprietorship. The proprietorship uses the cash method of accounting. He decides to incorporate and transfers the assets and liabilities of the sole proprietorship to the newly formed corporation in exchange for its stock. The assets, which include $10,000 of accounts receivable with a zero basis, have a basis of $20,000 and an FMV of $40,000. The liabilities include accounts payable of $12,000, which will be deductible when paid, and a note payable on medical equipment of $7,000. Jeremy's basis for his stock is
A)$40,000.
B)$20,000.
C)$13,000.
D)$8,000.

Question

Quizplus · Accepted Answer

Jeremy's basis for his stock is calculated as the basis of the assets transferred ($20,000) minus the liabilities assumed by the corporation ($12,000 accounts payable + $7,000 note payable = $19,000), resulting in a basis of $1,000. However, since the accounts payable are deductible when paid, they do not reduce the basis, so the correct calculation is $20,000 - $7,000 = $13,000.

Jeremy Operates a Business as a Sole Proprietorship