How to Figure Adjusted Basis for Depreciation

Computers depreciate over a five-year timeline.

When you purchase property for your business, the Internal Revenue Service allows you to deduct the annual wear and tear on the property, known as its depreciation. An asset's fair market value for accounting purposes is its basis. Every year, you must reduce the value of business assets on your accounting statements by their annual depreciation to calculate their adjusted bases. The adjusted basis of an asset is your remaining tax deduction for the asset's cost.

Instructions

1. Look up the initial purchase price of your asset. This is its original basis.

2. Add the cost of any improvements made to the asset to the asset's basis. Improvement costs increase an asset's basis for the depreciation calculation.

3. Look up the expected life of your asset as determined by the IRS. The IRS divides assets into property classes based on their expected timeline of use for a business. Computers are considered five-year assets, while office equipment is considered a seven-year asset. The property classes are listed on the depreciation page of the IRS website.

4. Divide the expected life of your asset into the number 1 and multiply the result by 100. This calculates the percentage of an asset's cost that may be depreciated each year. For a computer with a five-year timeline, its annual depreciation percentage is 1/5 x 100 = 20 percent per year.

5. Multiply your asset's basis by its depreciation deduction percentage. This calculates the annual reduction in the asset's basis from depreciation.

6. Subtract the depreciation deduction from the asset's basis. This calculates the asset's adjusted basis for the year.

7. Recalculate an asset's adjusted basis each year from depreciation until the asset is sold or fully depreciated.

References

• IRS.gov: A Brief Overview of Depreciation
• IRS.gov: Overview of Depreciation