How taxable allocations of income and interests are figured depends on a number of factors when strategically funding the business.
Where only cash or services are contributed, the tax basis of the owner's equity interest and the fair market value of the owner's equity interest will be equal. In other cases, the figures will be different.
These differences arise because the fair market value of the owner's equity interest is based on the fair market value, and not the tax basis, of the property the owner contributes to the entity. When cash or services are contributed, the face value of the cash and the lack of a prior value for the services mean that tax basis and fair market value are equal.
When non-cash property is contributed, free of any liability, the full appraised value is the property's fair market value. On the other hand, when non-cash property is contributed, subject to a liability that will be paid by the entity, the amount of the liability is subtracted from the appraised fair market value of the property, to determine the actual fair market value contributed.