Dick, a cash basis taxpayer, incorporates his sole proprietorship.He transfers the following items to newly created Orange Corporation. With respect to this transaction:

Question

Dick, a cash basis taxpayer, incorporates his sole proprietorship.He transfers the following items to newly created Orange Corporation.  With respect to this transaction:

Quizplus · Accepted Answer

As a cash basis taxpayer, Dick recognizes income and expenses when cash is received or paid. When Dick incorporates his sole proprietorship and transfers the building to the newly created corporation, he will recognize gain equal to the difference between the fair market value of the building and its tax basis. The fair market value is given as $125,000, and the tax basis is $120,000, so Dick will have a recognized gain of $5,000. This gain will be taxable to him in the year of the incorporation. The corporation's basis in the building will be equal to the fair market value of $125,000.

Dick, a Cash Basis Taxpayer, Incorporates His Sole Proprietorship