I have a newly formed S Corp that wants to transfer in autos that have been fully depreciated with outstanding loan balances. I understand that the assets would transfer in with a zero 0 basis but when the loan transfers in it creates a negative owners equity. I can not have a negative owner equity balance so what should my journal entry be?

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First off the auto's must be transfered in exchange for stock of the S-corp or it would not be a tax free exchange for the shareholder.

The auto's, for financial purposes, should be transfered and recorded at fair-market-value, but treated for tax purposes as having a zero depreciation basis. If the auto is later sold gain must be recognized by the S-corp from the zero tax basis and passed to the shareholder to pay taxes.

When you record fair market value the loans also would be recorded and must be less than the auto fair market value or it is not a tax-free exchange for stock. The excess of debt over value is considered "boot" [sale] that is taxable to the shareholder. Boot or no boot is determined for each auto transfered.

Entry example might be:

$20,000 Vehicles (Debit Asset account @ FMV Cost basis zero)

$15,000 Bank Loan-Auto (Credit Liability account)

$ 5,000 Common Stock Issued (Credit Equity account)

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>>autos that have been fully depreciated with outstanding loan balances<<

Thanks for the explanation, OldJack. I sometimes get stuck when I don't understand how the setup is even possible in the real world.

Where does one find a car loan that exceeds the length of time it takes for full depreciation under luxury auto limits? And if you have an old clunker like that, how do you get the bank to release the debt in favor of an entity with absolutely no credit history? Or transfer title on any car without triggering due-on-sale? And if it is such an old clunker that it generates "negative owner equity" against the basis of existing shares, however that works, is it even a contribution at all?

I just have this weird feeling about the question, as if the tax consequences aren't related to the business plan at all.

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>>Where does one find a car loan that exceeds the length of time it takes for full depreciation under luxury auto limits? <<

In the real world it is probably a loan after the purchase of the vehicle where the vehicle is simply offered as security for the loan.

>> And if you have an old clunker like that, how do you get the bank to release the debt in favor of an entity with absolutely no credit history? <<

In the real world the bank just gets personal guarantee from the shareholders plus the S-corp.

>>Or transfer title on any car without triggering due-on-sale? <<

In my state you can transfer title for as little as $1 sale price.

>>And if it is such an old clunker that it generates "negative owner equity" against the basis of existing shares, however that works, is it even a contribution at all? <<

In the real world for such negative situation it would not create negative equity, rather it would be treated as a sale, dividend, or distribution.

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I'd say the loan amt is a shareholder loan, not a bank loan. It was probably taken out,originally, by the shareholder and not the corp.

How do you transfer title to a vehicle with a loan without paying off the loan? Who owns the vehicle?

Maybe the best way to handle the situation is to keep the vehicle out of the corp and reimburse expenses or standard mileage.

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Of course if the loan has not been legally transfered from the shareholder to the S-corp, then the loan should not be recorded on the corp books. In that case if the S-corp makes loan payments, on behalf of the shareholder, such payments should be recorded as shareholder distributions.

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