When talking about the sale of a business, the term “carryover basis” can often come up. But what does it mean and how does it work? It’s essential for any business owner to understand the basics of carryover basis in order to make informed decisions when selling their business.
What Is Carryover Basis?
Carryover basis is a form of tax accounting that refers to the “underlying cost” of a given asset. This cost is calculated by subtracting the amount of depreciation taken from the initial purchase price. This remaining amount (the “carryover basis”) is used to calculate the cost of the asset for tax purposes.
What Does Carryover Basis Mean for Businesses?
For a business that is selling an asset, the carryover basis can be used to minimize that business’s tax burden. By transferring ownership with the asset’s carryover basis, the business can transfer a larger amount of its “basis” (in terms of ownership) to the new owner.
When this happens, the seller is able to defer the capital gains tax on the asset, as well as any future capital gains taxes, until the asset is actually sold. This can be beneficial for sellers who are interested in delaying the need to pay taxes on the sale of an asset.
Conclusion
Carryover basis is a form of tax accounting that allows businesses to transfer ownership of an asset with an established cost basis to the new owner. This can help to minimize a business’s tax burden by deferring capital gains taxes until the asset is actually sold. Understanding carryover basis makes it easier for business owners to make informed decisions when selling their businesses.