The basis of an asset that you own as a business is the price of that asset. This term is applicable to all types of long-term assets held by your company, including the real estate (land as well as buildings) vehicles, as well as equipment. Asset basis can affect depreciation costs as well as capital gains taxes.
This article explains what information to include on the original cost basis, and how it’s changed over the course of its existence to be reported on the company tax return.
Understanding Asset Basis
The value of an asset can be used to determine the foundation of capital assets within the business. Capital assets are the most important assets that provide value to businesses over a long time. They comprise buildings, vehicles machines, equipment, and furniture. “Capitalizing” is the term used to describe “capitalizing” is described as the process of purchasing an asset and determining its base and making it depreciable instead of accounting for it as cost. 1
Asset cost is utilized for accounting purposes, to display the worth of assets on the balance sheet of a business. It is used for tax purposes to calculate costs in the process of determining depreciation over the life of the asset as well as to calculate tax on capital gains after it’s transferred.
The cost of an asset can include:
- Purchase cost
- Sales tax
- Excise tax
- Costs of settlement
- Import duties
- Freight and handling
- Costs of interest
- Installation assemblies, testing, and installation
- Taxes on real estate (if they are borne by those who sell) 2
Asset basis also covers the cost of legal and accounting in certain instances, as well as the costs of major upgrades and replacements. For instance, warehouses may require an upgrade in their roof, or computer equipment could require updated software.
What’s not included in Asset Basis
The costs of assets for determining the base of business assets do not include:
- Administration and overhead expenses
- Repair and maintenance costs
- Minor replacement parts
- Consumables (like cleaning products or filters) 3
It is possible to write these costs off as tax-deductible expenses for the year.
For instance, if you purchase a computer for your company it could be based on the cost of delivery, sales tax, and set-up fees. This doesn’t cover the expense of printer paper or the cost of repairing the keypad that is damaged.
The base is the basis of Different Kinds of Assets
The base for intangible assets such as copyrights, patents, and trademarks is typically the cost of buying or developing the asset. Intangible assets typically are amortized, which is like depreciation.
The term “real estate,” also known as real property is the real estate that includes buildings and land on it. If you paid taxes on real estate for the seller, then you are able to add them to the basis. The price of land typically includes the costs of clearing the land, grade, and planting along with the landscaping. 4
If you own a house and convert it to a business or rental property you are able to start the process of depreciating the property. The base for this is the less of
- Fair market value at the date of the change
- The adjusted basis as of the date of the change
What happens to the asset basis
The value of the asset decreases and increases over the period you own the asset. Additionally, the basis can affect the selling price of the asset.
In the course of the life of the item, the upgrades you make will boost the basis. For instance, if you have a new roof installed on a building for business and the asset basis of the building will be raised by the expense for the roof. Other factors that affect the basis are:
- Investments in capital improvements, like a brand new roof for your building
- Evaluations of local improvement projects including water connections, sidewalks, or roads
- Restoring damaged property following the loss of a property to a casualty
- Costs of Zoning
- Legal charges for title work
The basis of an asset may decrease over time.
- Deductions for theft or casualty losses and reimbursements for insurance
- Certain credit points for vehicles
- Section 179 deductions
- Depreciation expenses taken5
If you decide to sell a business asset, you need to modify the value of the asset in order to determine whether there was an increase or decrease in value to satisfy taxes on capital gains reasons.
The importance of asset basis
Knowing the base of an asset, and incorporating every aspect of the acquisition of the asset is essential since the basis is determined differently for different reasons.
Asset basis is the method used to determine the depreciation rate of an asset. A higher basis means more depreciation expenses in each year of its useful time.
Taxes on capital gains are calculated on the gains in the value of the asset versus the initial cost of purchase and the base. A higher basis could mean less cost of capital gains taxes when the asset is transferred.
If you’ve determined the foundation for an asset by valuing it and keeping records, and you suffer losses as a result of a business catastrophe it is possible to make use of that basis as a deduction for casualty losses on your company tax return and also for insurance reasons. The loss could be assessed differently for every purpose.
The total basis of the capital assets of your business is an important element of the value of your company. The value of this asset can be utilized in financial analysis, for instance, the ratio of debt to the asset. A higher value for assets indicates a lower ratio of debt-to-asset which means that the business isn’t in danger of going into bankruptcy or bankruptcy.