Randy J. Elder, CPA, P.C.

When It Comes to Small Business Accounting, Know Your Basis

Phoenix Small Business Accounting: Know Your Basis

As a Phoenix small business accountant, I’ve seen first-hand how business owners can directly benefit from knowing a few key accounting terms. Tha is particularly the case when it comes to tax planning and limiting your tax liability. I know, you are probably thinking “boring.” But wait. What if I told you that by understanding these small business accounting terms and how they apply to your business it can help you limit your tax liability and avoid unpleasant surprises? Interested now? Take the time to understand a few accounting terms relevant for Phoenix small business. You’ll be glad you did.

The Small Business Accounting Term of the Day is Basis

So if you are still with me, today’s term is Basis. It is important to understand this term and how it applies to your business transactions as it can have a significant impact on how much tax you owe the government versus how much money you get to keep.

Think of Basis as the starting point. The starting monetary value from which a taxable gain or loss is calculated when an asset is sold. A simple example of Basis can be illustrated by the purchase and subsequent sale of stock. Let’s say you buy 100 shares of stock for $10 per share or $1000. A year later you are fortunate enough to sell the stock for $30 per share or $3000. In this example, the Basis is $1000 (100 shares x $10), and your gain is $2000 ($3000 minus the Basis of $1000). This figure is used to determine the tax liability on the sale of your stock. Of course, it can get more complicated than this simple example. I’ll keep it simple to cover the fundamentals without getting too complicated. For starters, there are several types of Basis:

Different Types of Basis for Small Business Accounting

Cost Basis

This is basically what it sounds like and is the simplest form of Basis. At the most basic level, Cost Basis is the amount that you initially pay for an asset such as equipment or vehicles. It is important to note that the Cost includes not only the purchase price but other acquisition costs as well. These can include additional fees such as title charges, sales tax and other fees and expenses that are part of the purchase transaction.

Adjusted Basis

In many instances, the Basis of your asset will go up or down after you’ve made the purchase. Activities that can change the asset Basis include improvements, damage, depreciation, and amortization. When you go to sell the asset, the Basis used to determine the gain or loss will be adjusted up or down from the original amount as a result of these activities.

Depreciated Basis

Under this scenario, the Basis of your asset is lowered from the original starting point. Assets that are commonly depreciated include business vehicles, tools, business machinery, and facilities. When you depreciate an asset, the Basis of the asset is reduced by the amount of the depreciation you have deducted. As you can probably guess, the Basis of an asset can be changed both upwards and downwards. For example, you might make improvements to property (adjust upwards) and depreciate (lower the Basis) of that same property.

Inherited and Gift Basis are less common and can become quite complicated so I won’t cover them here. If you have this situation in your business, give me a call, and I can help you sort out what you need to know when it comes to determining the Basis on an asset that you receive through inheritance or as a gift.

The examples here are relatively simple to help illustrate the Basis concept. As a Phoenix area small business accountant specializing in helping small business clients, I have seen many instances when determining the asset Basis and what the actual gain or loss will be when it comes time to sell quickly becomes quite complicated. Keeping good records throughout the life of the asset is always good practice and becomes especially important for determining the actual Basis of your asset. If you are thinking of buying or selling a business asset and have questions about determining the asset’s Basis, give me a call.