The Basis of an Asset
Your basis in a business asset is basically the cost of that asset. The term applies to all kinds of capital assets that are owned by your business, including real estate, land, equipment, and investments owned by the company, such as stocks, bonds, ETF's, and mutual funds.
It's important to capture all of the costs included in the purchase of an asset so you can turn the information over to your tax preparer to determine the basis. He can then calculate capital gains taxes when the asset is sold and depreciation expenses during the time you own the asset.
The asset cost includes the purchase price, shipping, installation, sales tax, and other expenses associated with its purchase. 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. It will increase if you make improvements to the property. For example, if you put a new roof on a business building, the asset basis in that building is increased by the cost of the new roof.
The basis can also decrease due to depreciation expenses are taken on the asset each year. These costs are considered business expenses so the higher the cost or basis, the more you can deduct as an expense—but this also reduces your basis in the asset.
Investments don't depreciate so this isn't a factor for those that asset class. Basis is calculated for each individual asset owned by your business. Asset costs are then accumulated in accounts, based on the type of assets, on the balance sheet.
Capitalized assets are a special class as they are business costs converted to assets rather than expenses, and the expense must be spread out over the life of the asset. Capitalized assets must be produced by your business for resale, made by your business for use in your business, or they must be property purchased for resale. As an example, business startup costs must be capitalized and spread out over a period of time.
Accounting and Taxes and Capital Gains and Depreciation
Knowing the basis of an asset and including all aspects of the purchase of that asset is important because the basis is calculated differently for different purposes.
Capital gains taxes are based on the gain in the price of the asset from the original cost of purchase or the basis. Then the asset basis is adjusted, if necessary. by costs associated with improving it as well as costs of sale.
A higher basis can mean lower capital gains tax when the asset is sold. Depreciation is the cost of an asset spread out over its useful life. Depreciation decreases the basis of an asset.
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 might be calculated differently for each.