Section 85 Rollover Agreement Example

Section 85 Rollover Agreement Example

A section 85 rollover agreement is a legal agreement that allows a business owner to transfer assets to a corporation without incurring any immediate tax liability. Essentially, this agreement allows for a tax-free exchange of assets between individuals and corporations, which can be incredibly beneficial for business owners looking to expand their operations.

To illustrate how a section 85 rollover agreement works, let`s take a look at an example. Imagine that John owns a small business that generates around $500,000 per year in revenue. He`s interested in incorporating his business to take advantage of the tax benefits and liability protections that come with being a corporation.

John has a number of assets that he wants to transfer to the corporation, including a fleet of vehicles, some machinery, and a piece of real estate that the business uses as a warehouse. However, he`s concerned about the tax implications of transferring these assets to the corporation outright.

This is where a section 85 rollover agreement comes in. John can enter into an agreement with the corporation that allows him to transfer these assets without triggering any immediate tax liability. The agreement specifies that the corporation will issue shares to John in exchange for the assets, and that the value of those shares will be equal to the fair market value of the assets being transferred.

In our example, let`s say that John`s fleet of vehicles is worth $50,000, his machinery is worth $100,000, and his warehouse property is worth $500,000. The total value of the assets being transferred is therefore $650,000.

Under the section 85 rollover agreement, the corporation would issue John $650,000 worth of shares in exchange for these assets. This means that John would effectively own $650,000 worth of the corporation`s shares and would not have to pay any tax on the transfer.

Of course, there are some important considerations to keep in mind when entering into a section 85 rollover agreement. For example, the transfer must be completed at “fair market value,” which means that an independent valuation of the assets may be required. Additionally, the terms of the agreement must be carefully negotiated to ensure that both parties are protected and that the transfer is completed in a way that meets all legal requirements.

Overall, a section 85 rollover agreement can be an incredibly useful tool for business owners looking to incorporate their operations. By allowing for a tax-free transfer of assets, these agreements can help entrepreneurs to grow their businesses without being burdened by additional taxes or legal complications.