What it means
When a business buys an asset such as a delivery van or an office building, the amount it records at the start is the unadjusted basis. That figure includes the purchase price and the costs needed to get the asset ready for use, such as delivery, installation, legal fees and non-refundable taxes.
Interest and routine running costs are generally not part of it. The reason it matters is that the unadjusted basis is the anchor for almost every later calculation.
Depreciation (spreading the cost of an asset over its useful life) is worked out from it, and so is the gain or loss when the asset is sold. If the starting number is wrong, every number built on it is wrong too.
Over time the figure changes, and the changed figure is the adjusted basis. Improvements and additions increase it, while depreciation, certain tax credits and casualty loss recoveries reduce it.
The unadjusted basis itself stays fixed as a record of what was originally paid. Assets that are not bought can have a different starting basis.
An inherited asset commonly starts at its value on the date of the owner's death, and a gifted asset can carry over the giver's basis. The rules differ by country and by type of asset, so the tax adviser should confirm which applies.
It is also worth separating the basis used for tax from the cost recorded in the accounting books. The two often start at the same figure, but depreciation rules and elections can make them drift apart, so many companies keep two parallel records.
Reconciling them each year avoids unpleasant surprises at the point of sale. Good record keeping is the practical discipline here.
Keeping the purchase invoice, the closing statement and the cost of every capital improvement makes it easy to defend the figure on audit and to compute a correct gain when the asset is sold.
In practice
Real-world examples.
Example
A courier firm buys a van for $45,000 and pays $3,000 to fit shelving and branding. The unadjusted basis is $48,000, and depreciation is calculated on that amount and not on the sticker price alone. If the firm had expensed the shelving instead, its asset record would be $3,000 too low.
Example
A dentist buys a clinic building for $1,200,000 and adds $30,000 of closing costs. Five years later she adds a new treatment wing costing $250,000. Her unadjusted basis stays at $1,230,000 while her adjusted basis rises by the cost of the extension, less depreciation.
Example
A farmer buys equipment for $90,000 and later sells it for $70,000 after claiming $35,000 of depreciation. The adjusted basis is $55,000, so the sale produces a $15,000 gain, even though the machine sold for less than its original cost. The gain arises because depreciation has already lowered the basis below the sale price.
Formula
Calculation
Adjusted basis = Unadjusted basis + Capital improvements - Depreciation taken
A company buys a building for $800,000 and pays $40,000 of legal fees and non-refundable transfer taxes, so the unadjusted basis is 800,000 + 40,000 = $840,000. Later it spends $60,000 on a new roof and claims $120,000 of depreciation in total. The adjusted basis is 840,000 + 60,000 - 120,000 = $780,000. If the building is then sold for $900,000, the taxable gain is 900,000 - 780,000 = $120,000.Case study
Seen in the real world.
Maple Ridge Printing is an illustrative, fictional business that bought a second production site for $2,000,000. When it prepared to sell the site eight years later, the finance manager found that the asset register showed only the $2,000,000 price paid.
Closing costs of $65,000 and two major upgrades costing $210,000 had been written to expenses and were missing from the basis. After the missing records were located and the entries corrected, the unadjusted basis became $2,065,000 and the adjusted basis reflected the upgrades less the depreciation claimed.
The illustrative point is that poor records would have overstated the taxable gain on sale. The company now attaches the closing statement and every capital invoice to the asset record on the day of purchase. The finance manager also added a yearly review in which each asset's unadjusted basis is agreed to its source document. The exercise takes a few hours and gives the auditors a clean trail.
Watch out
Common mistakes.
- Using only the purchase price and leaving out acquisition costs such as legal fees, installation and non-refundable taxes.
- Treating the unadjusted basis and the adjusted basis as the same number, when the second changes every year as depreciation is claimed.
- Adding routine repairs to the basis, when only improvements that add value or extend life are capitalised.
Questions
People also ask.
Does the unadjusted basis ever change?
No, it records the original cost, and later changes are tracked in the adjusted basis instead.
Is unadjusted basis the same as book value?
Not exactly, because book value is the cost less accumulated depreciation, whereas the unadjusted basis is the cost before any such deduction.
What is the basis of an asset received as a gift?
Often the giver's basis carries over, but the rules vary by country and circumstance, so confirm with a tax adviser.
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