A capital contribution is not income. It often compensates a business for a capital expenditure. Businesses that receive a capital contribution choose whether to treat it as:
- a reduction in their depreciation asset base.
Different treatments can be elected for each capital contribution.
If a business treats a contribution as income, it must return 10% of the contribution as taxable income every year for 10 years.
If a business uses the contribution to reduce its depreciation asset base, it must reduce the tax book value of the relevant assets by the value of the capital contribution.
Treatments for a capital contribution
An electricity lines company might ask a farmer to make a $6,000 capital contribution towards the $10,000 it will cost to connect their farmhouse to the network. The company could then return $600 in taxable income for the current year and for the following nine years. Alternately, the company could choose to reduce its depreciation asset base so that rather than claiming depreciation on the full $10,000 they would claim deductions on the $4,000 net cost.