I still remember the first time I filed taxes for my business. In addition to having no idea what a write-off really was, I also didn't worry too much about guessing on the numbers. A few government audits later, I discovered what it really meant to do things the right way. Over the years, I have met lots of business owners that weren't too worried about fudging the numbers, and nearly all of them have run into problems. Proper accounting is important, which is why I created this website dedicated to business accounting. I know that if you learn the right way to do things and focus on integrity, your business can avoid a world of problems.
As a business owner or sole proprietor, there are a number of new concepts that you need to learn about. One of these is the term "basis". What is basis, and how can it help you with your taxes? Here are a few answers.
What is Basis?
Basis is simply the cost you pay for an asset minus the depreciation taken over its useful life. To find the basis in an asset, you start with what is known as the "unadjusted basis". This is the purchase price, plus the costs of buying the asset. These costs include legal and title fees, inspection costs, transportation fees, and installation costs. This is the amount you spent getting the asset into service.
The "adjusted basis" then includes certain costs of improving the asset or increasing its useful life. If, for instance, you add on to a business building, you have added to its value over the long run. These costs will be added to the unadjusted basis to create the adjusted basis. A new roof, new HVAC system, or remodeling work can also be added to the basis. However, maintenance and repairs are deducted annually as expenses instead of adding to the basis.
Why is Basis Important?
Basis is more than just a statement of the asset's initial value. When you sell the asset, you pay taxes on what profit you made. Profit is the difference between what you paid for an asset and what you get for it when you sell. So, this means that the more you paid for an item, the lower your taxes will be upon selling it. The adjusted basis proves what money was spent on the item, so you need to know what the true amount actually was.
How do you prove basis above and beyond the initial sales price? Keep records of items that potentially will affect basis, such as all improvements as well as major renovation projects. Your accounting service can help determine if such costs qualify as business expenses now or if they will be added to what's called the "capital cost" of the asset for basis value.
Not sure how to figure the basis for your business asset? Work with an experienced accountant to figure out what counts toward the basis to reduce your tax bill. Doing so is one way that every business owner can work to minimize taxes and maximize profit.
Share30 May 2019
