Basis Definition

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Modified on 2009/12/02 09:42 by tmkern Categorized as Accounting

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Basis Definition¶

In accounting, basis refers to the value of an asset for tax purposes. The basis of an asset is the cost of the asset that is reported to the Internal Revenue Service(IRS). It includes the original purchase price of the asset plus any acquisition expenses. The basis may increase by the value of any subsequent capital improvement in the asset, or it may decrease due to depreciation. Basis is also referred to as cost basis or tax basis.

The basis is also the amount used to calculate gains or losses if and when the asset is sold or scrapped. For example, if shares of common stock are purchased for $1,000, and then sold three years later for $1,500, the basis is still $1,000 and the taxpayer would record a capital gain of $500.

Likewise, if equipment is purchased for $1,000 with installation and shipping fees of $500, the basis for that asset would be $1,500. If the equipment is depreciated down to $500 and then sold for $300, the taxpayer would record a loss of $200.