How to Calculate Tax Basis

Calculating tax basis correctly for newly acquired assets affects the annual depreciation expense used to reduce income for tax purposes. Therefore, it is important to include allowable expenses incurred in the acquisition of new assets to calculate the correct tax basis. Proper accounting for assets helps to reduce the business tax liability for the useful life of the asset. The IRS has specific guidelines to calculate tax basis for future depreciation that must be strictly adhered to for business assets and income producing property.

Difficulty: Moderate

Instructions

Things You'll Need:

• IRS guidelines for depreciation and tax basis
• Land values for real estate
• Costs of acquisition
• Computer or calculator

1. Begin with the actual purchase price of the new asset to calculate tax basis. Some examples of assets are machinery, real estate, vehicles, office equipment and goodwill used at least 50 percent for the production of income.

2. Add costs to the original purchase price incurred in purchasing the asset and costs involved in getting the asset ready for the purpose for which it was purchased. These costs may include recording fees, legal fees, surveys, abstract fees, title insurance, setup costs, installation costs, improvements and repairs needed to place the property into service. Please follow the links in the Resource section of this article to find the IRS guidelines for the specific type of asset that you are placing into service. IRS Publication 551on real property lists specific items that cannot be included in the tax basis.

3. Deduct the fair market value of the land that real estate sits on, if the new asset acquired is a building, to calculate the tax basis because land cannot be depreciated. Request information about current land values from the township or city assessor where the land is located.

4. Calculate the total after all eligible additions and subtractions to arrive at the tax basis for your newly acquired asset and plug it into your depreciation schedule.

Tips & Warnings

• Property must be used 50 percent or more for business purposes to qualify for a tax deduction. Some expenses may be eligible to be written off directly in the current tax year instead of added into the tax basis of a new asset. Choose the method that helps your overall financial picture.
• For real estate, you must subtract the fair market value of the land from the tax basis since land is not depreciable.

References

• Depreciation and Amortization - Information on Listed Property
• Overview of Depreciation