What Is an Assetís Depreciable Basis?
An asset's basis is increased by the cost. An asset's initial basis depends on how the asset was acquired. See where the burden of proof lies.
August 28, 2008
Sponsored by BNA Software
by Nancy Faussett, CPA
There is no one formula for computing an asset's depreciable basis. It is not necessarily its fair market value and it is not its replacement cost. While an asset's basis is increased by the cost of any freight, installation and improvements (but not repairs), an asset's initial basis depends on how the asset was acquired:
- Purchased: Obviously the most common form of acquiring an asset is by purchase. Generally, when acquired by purchase, an asset's basis is its cost, including sales tax, but less any rebate received. An asset's cost includes any liabilities assumed or any liabilities to which the asset is subject. Also included are any commissions, title fees, transfer taxes and the cost of any options to purchase.
This assumes, however, that the purchase was made in an arm's-length transaction. If this is not the case, the asset's basis for depreciation purposes is the greater of the purchase price or the seller's adjusted basis in the asset, increased by any gift taxes paid (since it may be re-characterized as a gift to the seller). If the purchase was by a shareholder, any excess paid to the corporation may be considered paid-in-capital. If the purchaser was the corporation, any excess paid to the shareholder may be considered a distribution or dividend.
- Gifted: If depreciable property is received as a gift, the asset's basis is its fair market value (FMV) whenever depreciation begins. (If it's not depreciable, its basis would be the donor's basis unless later determining a loss, in which case it would be its FMV.) Generally, any gift taxes paid will increase the basis.
- Inherited: Generally, the basis of property acquired from or through a decedent is its FMV at the date of the decedent's death or on the alternate valuation date.
Note that there is a temporary provision under Section 1022, which provides that the basis of property inherited after 2009 and before 2011, is the decedentís basis with certain modifications.
- Exchanged: If received in a fully taxable exchange, the basis of the acquired asset is its FMV. If it was acquired in a tax free or partially taxable exchange, its basis is determined by whichever tax code provision applies to the exchange. If, for example, it's acquired in a Section 1031 like-kind exchange, its basis is the adjusted basis of the exchanged property; increased by any recognized gain and any additional consideration paid; and decreased by any money received, by the FMV of other non-like-kind property received, and by any recognized loss.
If the property is acquired in a Section 1033 involuntary conversion, generally its basis is the adjusted basis of the converted property; increased by any recognized gain; and decreased by any money received and not spent on similar or related property, by the FMV of other non-like-kind property received, and by any recognized loss. The basis of qualifying property acquired with Section 1033 proceeds is the cost of the acquired property, decreased by any deferred gain. If several replacement assets are acquired, the basis must be allocated among the properties according to their cost.
- Distributed: The basis of property (other than stock) received by a shareholder in a non-liquidating distribution is its FMV on the date of the distribution.
- Contributed: Generally, when a corporation receives property contributed by a shareholder, its basis is the shareholder's basis, increased by any gain recognized by the shareholder on the transfer. If the transferor is not a shareholder, the basis is usually zero.
- Reacquired: If a taxpayer reacquires an asset from a creditor, the basis of the asset is whatever is paid to the creditor, not the basis before it was transferred to the creditor.
- Constructed: The basis for constructed assets is the cost of the construction, less any amounts waived by the builder due to delay or other shortcomings. Also, included are the costs of architectural services, design costs, costs of training staff to use the constructed property, construction period insurance, accounting fees, salaries of employees who work on the construction and the depreciation of equipment used in the construction.
- Self-constructed: Self-constructed property must follow the rules under Section 263A and will not be covered in this article.
- Found: If you find property and its FMV must be included in your gross income, your basis in the property equals the includible amount.
- Imported: If you import property, its basis is generally its customs value, increased by the cost of freight, insurance, any construction or assembly after arriving in the U.S. and any miscellaneous charges (such as a finders fee commission).
Keeping record of how you acquired depreciable property is essential because the burden of proof is on the taxpayer should the IRS ever question how an asset's basis was calculated. Fixed asset management software can be of assistance both for initially recording an asset and also by maintaining an audit trail of its history.
Nancy Faussett, CPA, has over 25 years of tax accounting experience. With BNA Software since October 2001, Nancy serves as in-house expert on fixed assets, depreciation, and various areas of corporate and individual income taxation. Author of the Best Depreciation Guide for Best Software (now Sage), Nancy has also been published in Strategic Finance and the ACT Journal. Previously she was vice president of tax preparation for General Business Services and later worked as a depreciation and tax specialist for Best Software.