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

Question

Quizplus · Accepted Answer

The basis of the stock is equal to the net basis of the assets transferred to the corporation. The net basis is the total basis of the assets ($20,000) minus the total liabilities ($12,000 + $7,000 = $19,000). Therefore, the basis of the stock is $20,000 - $19,000 = $1,000.

Jeremy Operates a Business as a Sole Proprietorship