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Taxmap/pubs/p225-027.htm#TXMP5d9e3d9e Adjusted Basis

Adjusted Basis

Before figuring gain or loss on a sale, exchange, or other disposition of property or figuring allowable depreciation, depletion, or amortization, you must usually make certain adjustments (increases and decreases) to the basis of the property. The result of these adjustments is the adjusted basis of the property.

Taxmap/pubs/p225-027.htm#TXMP47ee6131 Increases to Basis

Basis, Increases

Increase the basis of any property by all items properly added to a capital account. These include the cost of any improvements having a useful life of more than 1 year.

The following costs increase the basis of property.

• The cost of extending utility service lines to property.
• Legal fees, such as the cost of defending and perfecting title.
• Legal fees for seeking a decrease in an assessment levied against property to pay for local improvements.

If you make additions or improvements to business property, keep separate accounts for them. Depreciate the basis of each addition or improvement according to the depreciation rules that would apply to the original property if you had placed it in service at the same time you placed the addition or improvement in service. See chapter 7.

Taxmap/pubs/p225-027.htm#TXMP0bb37328 Assessments for local improvements.

Increase the basis of property by assessments for items such as paving roads and building ditches that increase the value of the property assessed. Do not deduct them as taxes. However, you can deduct as taxes amounts assessed for maintenance or repairs, or for meeting interest charges related to the improvements.

Taxmap/pubs/p225-027.htm#TXMP0ba45ead Deducting vs. capitalizing costs.

Do not add to your basis costs you can deduct as current expenses. For example, amounts paid for incidental repairs or maintenance are deductible as business expenses and are not added to basis. However, you can elect either to deduct or to capitalize certain other costs. See chapter 8 in Publication 535.

Taxmap/pubs/p225-027.htm#TXMP01cfbac2 Decreases to Basis

Decreases to Basis

The following items reduce the basis of property.

• Section 179 deduction.
• Deductions previously allowed or allowable for amortization, depreciation, and depletion.
• Special depreciation allowance on qualified property.
• Deduction for clean-fuel vehicles and clean-fuel vehicle refueling property.
• Investment credit (part or all) taken.
• Casualty and theft losses and insurance reimbursements.
• Payments you receive for granting an easement.
• Exclusion from income of subsidies for energy conservation measures.
• Credit for qualified electric vehicles.
• Certain canceled debt excluded from income.
• Rebates from a manufacturer or seller.
• Patronage dividends received from a cooperative association as a result of a purchase of property. See Patronage Dividends in chapter 3.
• Gas-guzzler tax.
• Credit for employer-provided childcare.

Some of these items are discussed next.

Taxmap/pubs/p225-027.htm#TXMP3757e9b8 Depreciation and section 179 deduction.

The adjustments you must make to the basis of property if you take the section 179 deduction or depreciate the property are explained below. For more information on these deductions, see chapter 7.

Taxmap/pubs/p225-027.htm#TXMP31048af1 Section 179 deduction.

If you take the section 179 expense deduction for all or part of the cost of qualifying business property, decrease the basis of the property by the deduction.

Taxmap/pubs/p225-027.htm#TXMP470acbdd Depreciation.

Decrease the basis of property by the depreciation you deducted, or could have deducted, on your tax returns under the method of depreciation you chose. If you took less depreciation than you could have or you did not take a depreciation deduction, reduce the basis by the full amount of depreciation you could have taken. If you deducted more depreciation than you should have, decrease your basis by the amount you should have deducted plus the part of the excess depreciation you deducted that actually reduced your tax liability for any year.

See chapter 7 for information on figuring the depreciation you should have claimed. See also Changing Your Accounting Method in chapter 7 for information that may benefit you if you deducted the wrong amount of depreciation.

In decreasing your basis for depreciation, take into account the amount deducted on your tax returns as depreciation and any depreciation you must capitalize under the uniform capitalization rules.

Taxmap/pubs/p225-027.htm#TXMP548620ef Special depreciation allowance.

Decrease the basis of property by the special depreciation allowance for qualified property. Do not decrease the basis if you made the election not to claim any special allowance.

Taxmap/pubs/p225-027.htm#TXMP6b1f48d9 Deduction for clean-fuel vehicle and refueling property.

If you take the deduction for clean-fuel vehicles or clean-fuel vehicle refueling property, decrease the basis of the property by the deduction. For more information, see chapter 12 in Publication 535.

Taxmap/pubs/p225-027.htm#TXMP40ed64d0 Casualty and theft losses.

If you have a casualty or theft loss, decrease the basis of the property by any insurance or other reimbursement. Also, decrease it by any deductible loss not covered by insurance. See chapter 11 for information about figuring your casualty or theft loss.

You must increase your basis in the property by the amount you spend on repairs that substantially prolong the life of the property, increase its value, or adapt it to a different use. To make this determination, compare the repaired property to the property before the casualty.

Taxmap/pubs/p225-027.htm#TXMP42ec5c6c Easements.

The amount you receive for granting an easement is usually considered to be proceeds from the sale of an interest in the real property. It reduces the basis of the affected part of the property. If the amount received is more than the basis of the part of the property affected by the easement, reduce your basis in that part to zero and treat the excess as a recognized gain. See Easements and rights-of-way in chapter 3.

Taxmap/pubs/p225-027.htm#TXMP093a7e30 Exclusion from income of subsidies for energy conservation measures.

You can exclude from gross income any subsidy you received from a public utility company for the purchase or installation of an energy conservation measure for a dwelling unit. Reduce the basis of the property by the excluded amount.

Taxmap/pubs/p225-027.htm#TXMP68213b7e Credit for qualified electric vehicles.

If you claim the credit for a qualified electric vehicle, you must reduce your basis in that vehicle by the lesser of the following amounts.

• $4,000.
• 10% of the vehicle's cost.

 
This reduction amount applies even if the credit allowed is less than that amount. For more information on this credit, see chapter 12 in Publication 535.

Taxmap/pubs/p225-027.htm#TXMP352e1bf4 Canceled debt excluded from income.

If a debt you owe is canceled or forgiven, other than as a gift or bequest, you generally must include the canceled amount in your gross income for tax purposes. A debt includes any indebtedness for which you are liable or which attaches to property you hold.

You can exclude your canceled debt from income if the debt is any of the following.

1. Debt canceled in a bankruptcy case or when you are insolvent.
2. Qualified farm debt.
3. Qualified real property business debt (provided you are not a C corporation).

If you exclude canceled debt described in (1) or (2), you may have to reduce the basis of your depreciable and nondepreciable property. If you exclude canceled debt described in (3), you must only reduce the basis of your depreciable property by the excluded amount.

For more information about canceled debt in a bankruptcy case, see Publication 908, Bankruptcy Tax Guide. For more information about insolvency and canceled debt that is qualified farm debt, see chapter 3. For more information about qualified real property business debt, see chapter 5 in Publication 334, Tax Guide for Small Business.

Taxmap/pubs/p225-027.htm#TXMP7b1112a5 Credit for employer-provided childcare.

If you claim the credit for employer-provided childcare for amounts paid or incurred to acquire, construct, rehabilitate, or expand property used as part of your qualified childcare facility, you must reduce your basis in the property by the amount of the credit. For information on the credit, see Form 8882, Credit for Employer-Provided Childcare Facilities and Services.

Previous Page:  Publication 225 - Farmer's Tax Guide - Basis of Assets Next Page:  Publication 225 - Farmer's Tax Guide - Basis Other Than Cost Use     to find additional instances of index items.