Adjusted basis               

In accounting, the adjusted basis is the net cost of the asset after making some adjustments of items which is related to tax. An adjusted basis is one of the two variables in the formula which is used to calculate losses and gains while finding out the gross income for the tax purposes.  Amount realized minus adjusted basis gives us the amount- if it is negative it gives of realized loss or if it is positive it gives amount of realized gain.

Statutory definition

The “Section 1012 of the Internal Revenue Code” describes basis as a taxpayer’s cost in obtaining the property, apart from as given in the “Sections 1001-1092”. Then, the Section 1016 lists twenty seven adjustments to this basis. Usually, improvements to the property increase basis when depreciation reductions decrease it.

Computation of Adjusted basis is as follows:

Adjusted basis generally computed by starting with the asset’s actual cost basis and making some adjustments. The adjusted basis is computed as follows:

• Purchase costs (sales tax, title and escrow fees, shipping, broker commissions, etc.)
• Improvements (substantial repairs and rehabilitation expenses)
• Legal fees (to perfect or to defend title to zoning costs, the property etc.)
• Selling costs (broker commissions, title and escrow fees, transfer fees, shipping, etc.)

Minus the costs

• amortization or depletion, accumulated depreciation
• Theft Loss or Casualty
• Other decreases to the basis

Adjusted basis

Adjusted basis methods are important for computing ordinary gains and capital gains when the asset is sold. A total list of adjustments that decrease or increase basis is found in the “IRS Publication 551, Basis of Assets”. The adjusted basis for the tax purposes is different than for the financial accounting (generally accepted accounting principles) losses or gains on sales of the capital assets.

Questionnaire:

• What is adjusted basis?
• How adjusted basis is calculated?