Capital Contribution

Capital contribution refers to the cash or property acquired by a corporation from a shareholder without the receipt of additional stock. This amount is added to the basis of the shareholder's existing stock, and the corporation's basis is carried over from the shareholder.
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Definition

Capital Contribution is the provision of cash or property to a corporation by a shareholder without receiving additional stock in return. The shareholder’s basis in the existing stock is increased by the amount of the contribution, and the corporation assumes the shareholder’s basis in the contributed assets.

Examples

  1. Cash Contribution: A shareholder infuses $50,000 into the corporation without receiving any new shares. The shareholder’s basis in their stock increases by $50,000.
  2. Property Contribution: A shareholder contributes property valued at $100,000 with a basis of $70,000. The shareholder’s basis in the existing stock increases by $70,000, and the corporation assumes a basis of $70,000 for the contributed property.

Frequently Asked Questions (FAQs)

What is the impact of a capital contribution on a shareholder’s basis?

A capital contribution increases the shareholder’s basis in their existing stock by the amount of the contribution.

Does a shareholder receive additional stock for a capital contribution?

No, the shareholder does not receive additional stock for making a capital contribution.

How is the corporation’s basis in contributed property determined?

The corporation’s basis in the contributed property is the same as the shareholder’s adjusted basis in that property.

Are there any tax implications for the corporation receiving a capital contribution?

Typically, capital contributions made by shareholders do not result in immediate tax consequences for the corporation.

Can capital contributions be made in forms other than cash?

Yes, capital contributions can be made in the form of cash, tangible assets such as real estate, or intangible assets such as patents.

  • Basis: The value used to determine gain or loss for tax purposes when an asset is sold.
  • Paid-in Capital: The total amount of cash and other assets received by a corporation from its shareholders in exchange for stock.
  • Retained Earnings: The accumulated net income of a corporation that is retained in the business rather than distributed as dividends.
  • Shareholder Equity: The residual interest in the assets of the corporation after deducting liabilities.

Online Resources

Suggested Books for Further Studies

  1. Fundamentals of Corporate Finance by Stephen A. Ross, Randolph W. Westerfield, and Bradford D. Jordan
  2. Intermediate Accounting by Donald E. Kieso, Jerry J. Weygandt, and Terry D. Warfield
  3. Financial Accounting: An International Introduction by David Alexander and Christopher Nobes

Fundamentals of Capital Contribution: Corporate Finance Basics Quiz

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Capital Costs
Capital Contributed in Excess of Par Value