What is Tax Basis?

Basis is generally the cost of property, including purchase price, sales tax, freight and installation. The IRS explains basis in Publication 551.

Adjusted basis

Basis changes over time. It increases with improvements and certain costs, and decreases with depreciation, section 179 deductions, casualty losses and other items. The result is the adjusted basis, used when the property is sold to calculate gain or loss: amount realized minus adjusted basis.

Example

A business buys equipment for $30,000 and claims $18,000 of tax depreciation. Adjusted basis is $12,000. If it sells for $20,000, the taxable gain is $8,000, part or all of which may be depreciation recapture.

Owner basis in pass-through entities

Owners of S corporations and partnerships also have basis in their ownership interest. It generally increases with contributions and allocated income and decreases with distributions and allocated losses. Basis determines whether:

• Losses passed through can be deducted
• Distributions are tax-free or taxable

S corporation shareholders and partners are responsible for tracking it; see Form 1120-S and Form 1065.

Basis vs book value

Tax basis often differs from book value on financial statements, because tax and book depreciation differ.

Records to keep

Keep purchase documents, improvement invoices and depreciation schedules for as long as you own the property and for the period after sale needed to support the return. See how long to keep business records.

Related terms

• Book Value: Book value is the amount at which an asset or a business is carried on the balance sheet.
• Depreciation Recapture: Depreciation recapture is the portion of gain on the sale of a depreciated asset that is taxed as ordinary income because of earlier depreciation deductions.
• Depreciation: Depreciation spreads the cost of a long-lived business asset over the years it is used, rather than deducting it all at once.

Browse more definitions in the small business glossary.