Tax basis is an important concept for business owners and individual taxpayers to understand. It’s the dollar amount used to calculate gains or losses from the sale of an asset or investment. The tax basis is used to calculate how much income tax is due on the sale of an asset.
In the context of individual taxes, your basis in an asset is generally its cost. When filing your taxes, if you sell the asset, your gain or loss is the difference between the sales price and your basis. For example, if you buy a piece of property for $200,000 and then sell it for $215,000, your taxable gain would be $15,000.
This concept applies to business owners and investors as well. If you buy machinery for your business for $100,000 and then sell it for $120,000, your taxable gain would be $20,000. In this case, the tax basis of the machinery is $100,000.
It should be noted that the tax basis of an asset can change over time. For example, a business may have to depreciate machinery over time. This means that the original cost of the machinery is no longer the tax basis. Instead, the depreciated value of the machinery is used.
In addition, certain deductions can be taken that reduce the tax basis. For example, if a business pays lobbying expenses, these can be deducted from its income and reduce its tax basis. When calculating gains or losses on the sale of an asset, the reduced tax basis must be taken into account.
Important Thing to Remember
Ultimately, it is important to be aware of how your tax basis may affect your taxes. This can be true if you are buying, selling, or making deductions from assets. In all cases, calculating the correct tax basis is essential for ensuring accurate calculation of gains or losses for tax reporting purposes.