Your basis in a business asset is essentially the cost of that asset. The term applies to all types of assets held by your business, including real estate, land, equipment, and investments owned by the business, such as stocks, bonds, ETFs, and mutual fund investments.
You must enter all costs associated with purchasing an asset so that you can provide information to your tax preparer to determine the basis. You can then calculate capital gains taxes when selling the asset and depreciation costs while holding the asset.
Cost
The asset's cost includes the purchase price, transportation, installation, sales tax, and other expenses associated with the acquisition. If you are purchasing a computer system for your business, the basis may include shipping costs, selling costs, and installation costs. For investing activities, the cost corresponds to the share price at the acquisition time, including any fees or transaction costs.
Adjustments
The asset basis can change over the life of the business. It will increase if you make amendments to the property. For example, if you install a new roof on a commercial building, the building's asset basis increases with the new roof's cost.
The basis may also decrease due to the depreciation expense incurred 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 it also reduces your asset basis.
Investments are not depreciated, so this is not a factor for those with this asset class. Asset basis is calculated for each asset in your business. The assets' costs are then accumulated in the accounts, depending on the type of activity on the balance sheet.
Capitalization
Fixed assets are a special class in that they are business costs converted into assets rather than expenses, and the expenses must be spread over the life of the asset. Your business must produce capitalized assets for resale, manufactured by your business for use in your business, or goods purchased for resale. For instance, the costs of starting a business must be capitalized and spread over a while.
Taxes, accounting, capital gains, and depreciation
Knowing the basis of the asset and including all aspects of acquiring that resource is important because it is calculated differently for different purposes.
Capital gains taxes are based on the asset's price over the initial or basic acquisition cost. The asset basis is then adjusted as needed—the costs associated with its improvement and the selling costs.
A broader basis can mean a reduction in capital gains tax when the asset is sold. Depreciation is the cost of an asset spread over its useful life. Depreciation reduces the asset basis.
Suppose you have established the basis for an asset through valuation and recording, and you have a loss due to a business claim. In that case, you can use that basis for a damage deduction in your income tax return business and insurance purposes. The loss can be calculated differently for each.
How to determine the initial investment in the property
How the initial investment in the property is determined can vary. In most circumstances, the basis is the cost of the asset. The cost includes sales taxes and other purchase charges. Check out the list below for other cases and calculate the cost basis of real estate.
For inherited assets, the basis is the fair market value (FMV) at the date of death.
For gifted goods, the basis depends on any profit or loss on the sale of the good: If there is gain, the basis is the donor's adjusted base. In the event of a loss, the basis is the lower of the donor's adjusted basis or fair market value at the donation time.
For properties that have been converted from personal to commercial use, the basis used to calculate depreciation (i.e., depreciable basis) is usually the adjusted basis or fair market value of the property at the time of conversion. When you sell real estate, the basis mentioned in the tax return depends on whether the property was sold for profit or loss: In the case of profit, the basis is the adjusted basis when you sell the property. In the event of a loss, the basis for calculating the allowable loss is the lower of the adjusted basis (i.e., cost less depreciation) or the remaining depreciable basis (i.e., fair market value upon conversion to commercial use).
Calculating Stock Cost Basis
If you own stocks or other investments, you will use a similar method to calculate the stock's basis price. Typically, the inventory basis will be what you paid for the inventory.
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