What is the Basis in an Asset ?

Basis in an Asset in Depreciation and Capital Gains

Basis in an Asset
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What is the Basis of an Asset? 

The basis in a business asset is the cost of that asset.

Asset basis applies to all kinds of capital assets. These assets, which are owned by the business, can include:

  • Real estate, including land and buildings
  • Investments owned by the company, including stocks, bonds, ETF's, and mutual funds.

​The cost of the asset includes the purchase price, shipping, installation, sales tax, and other expenses associated with the purchase of the asset.

For example, if you buy a computer system for your business, the basis can include delivery charges, sales taxes, and setup fees. 

For investment assets, the cost is the price of the stock at purchase, including any commissions or fees on the transaction. 

Asset basis can change over the life of the asset:

  • The basis increases if you make improvements to the property. For example, if you have a building for your business, and you put a new roof on it, the asset basis in that building is increased by the cost of the new roof. 
  • The basis decreases by depreciation expenses taken on the asset each year, These costs are considered business expenses, so the higher the cost (basis), the more you deduct as an expense, but the lower the basis of the asset. Investments don't depreciate, so this isn't a factor in the adjusted asset basis. 

Asset basis is calculated for each individual asset owned by your business, then all the asset costs are accumulated in accounts, based on the type of assets, on the business balance sheet. 

Basis of Capitalized Assets

Capitalized assets are a special class of business assets. These assets are business costs turned into assets rather than expenses. By turning these costs into assets, they expense must be spread out over the life of the asset.  

  • Produced by your business for resale, 
  • Produced (made) by your business for use in your business, 
  • Property purchased for resale. 

As an example, business startup costs must be capitalized, that is, spread out over a period of time. 

Asset Basis in Accounting and Taxes

Knowing the basis of an asset, and including all aspects of the purchase of that asset is important for several purposes. The basis may be calculated differently for each purpose. 

Capital gains. Capital gains taxes are based on the gain in price of the asset from the original cost of purchase (the basis), and then the asset basis is adjusted, if necessary. A higher basis can mean lower capital gains tax. 

Depreciation. Depreciation is the cost of an asset spread out over its useful life. Depreciation, as noted above, decreases the basis of an asset.

Casualty Losses. If you have established the basis of an asset through valuation and records, and you have a loss due to a business disaster, you can use that basis both for a casualty loss deduction on your business tax return and for insurance purposes. The loss may be calculated differently for each purpose.

 

Why is Asset Basis Important? 

It's important to capture all of the costs included in the purchase of an asset, to turn over to your tax preparer to determine the basis and calculate capital gains taxes when the asset is sold and for depreciation expenses during the time you own the asset.
 

More information on Basis of Assets

IRS Publication 551 - Basis of Assets


Depreciating Business Assets
Capital Gains and Capital Gains Taxes

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