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Tax basis is normally the cost to purchase a capital asset, less any previous depreciation previously claimed. Capital assets are assets that a business will purchase and use for longer than a year. As they are used for more than the current year, the cost of their purchase must be deducted over their usable life. This is done through a selected depreciation method.
There are certain other factors that affect tax basis. For example, the basis of stocks or bonds would include not only the purchase price but also the costs of purchase, including commissions and transfer fees. In addition, the basis for real property would include closing or settlement costs involved in the transactions. However, loan costs, such as loan assumption fees, points, or fees for refinancing, must be capitalized, meaning subtracted over more than a year period.
If a business purchases a major asset, such as equipment, the cost of getting the asset ready for use, including installation costs, are added to the tax basis of the asset. This is increased by any improvements that extend the life of the asset. Items that reduce the tax basis would include such things as taking a section 179 deduction, which entails deducting a portion of the cost in addition to allowed depreciation in the first year; yearly depreciation; and certain tax credits.
Business may also participate in what is called a like-kind exchange. This means the company exchanges a business asset for another business asset from another company. In this case, the tax basis for the newly acquired asset will be the same as that of the item given up, minus any additional money that has been received or plus any money that was given up. If there is no money or items other than the like-kind property exchanged, then neither company has a taxable transaction.
In cases where the item was a gift, the tax basis of the asset is normally the adjusted basis of the donor, or the donor's basis prior to the gift. For property that is inherited, the tax basis in the asset is the fair market value of the property at the date of death of the decedent. This would be determined by the appraised value at the time the asset is inherited. However, if the beneficiary had originally given the property to the decedent within a year of his or her death, the tax basis would be the same as the basis of that individual at the time of death.
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