Tax laws like Section 118 deal with private deposits in terms of defining the concept of a profit. As a business owner, you generally tax your company profits, not its assets. Capital contributions are considered performance neutral, since there is no profit or loss generated by the payment. This means you can increase your operating assets with a capital contribution, without affecting your business’s tax status. A profit or loss with a tax impact would only arise if you sell an item that was previously transferred to the company as a capital contribution. The profit or loss is the difference between the item’s sale value and its value at the time of deposit.
However, it is crucial that you record the deposit’s value correctly. Valuing a cash deposit is easy, but things can become more difficult when accurately trying to quantify a contribution in kind. If the item is previously used, then the original purchase price no longer counts, since the item has decreased in value since the time of purchase.
In U.S. Generally Accepted Accounting Principles (GAAP), the fair value measurement of a deposit liability is described as the amount payable on demand as of the reporting date. Items that you have inherited and then put into your company are also valued using this method. However, the decisive factor for the valuation is not the date you inherited, but the date that the deceased acquired the item.
A special feature of private deposits is deductible input tax: Let’s say you buy a car as a private individual, which you then contribute to your company after one year. When you bought the car, let’s say you paid 19 percent sales tax (this number will vary from state to state) on the purchase price. However, as soon as the car is transferred to your company as a capital transfer, you are entitled to recover the sales from the amortized acquisition costs from the state tax authorities. This also applies to any other items subject to sales that you purchase privately and then contribute to your company.
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