Basis, Business Basis, Tax (Adjusted) Basis - Defined

Basis: Generally the cost of your item, increased by sales tax and improvements.

Business Basis: Multiply the basis of your item by the percentage you use the item for business purposes. The result is your business basis of the item.

Tax Basis (Adjusted Basis): Your basis, reduced by any Section 179 or other depreciation you have ever taken on the item for tax purposes.

Examples:

Joel has a computer. To figure his basis, he needs to know what he paid for it (plus sales tax). He paid $1000. $1000 is his basis.
(Improvement) He adds a larger hard drive to the computer for a cost of $100. His basis is now $1100 (1000 + 100).

Joel only uses the computer , with the larger hard drive, 70% for business purposes. His basis is $1100. But, his business basis is $770 (1100 - 70%).

When he is ready to sell the computer, he will need to know his tax, or adjusted, basis. Over the years, he has depreciated the computer using straight-line depreciation. The amounts he has taken thus far, add up to $440. He subtracts that from his $1100 basis. His tax basis becomes $660.

His basis is $1100. His business basis is $770. His tax basis is currently $660.

If Joel had never taken any deductions on his computer, his tax basis would be his basis, reduced by the amount he could have depreciated it using straight-line depreciation tables.

This and other information may be found in the book listed below.
Permission to use or excerpt with proper attribution.
Simon Elisha, author, Taxes for Online Sellers—

A How-To Guide for Individuals on Federal Tax for Internet Sales

ISBN: 978-0-9796328-0-8

http://www.taxesforonlinesellers.com

Repair versus Improvement

When figuring the worth (basis) of most items claimed for expense or deduction on your taxes, the amount is generally what you paid for it­ ─ including sales tax. This amount can be increased by improvements, but it is not increased by repairs. What is the difference?

Imagine a number line. The condition of an item when you purchased it is in the center of your number line, at zero. Wear and tear, including damages, drags the condition number down into the negatives. When you repair something, you are simply getting it back to zero, the original condition, on your number line. When you improve something, you are improving the condition into the positive numbers on your number line. You are making the item better than it was when you purchased it.

This and other information may be found in the book listed below.

Permission to use or excerpt with proper attribution.

Simon Elisha, author, Taxes for Online Sellers—
A How-To Guide for Individuals on Federal Tax for Internet Sales
ISBN: 978-0-9796328-0-8
http://www.taxesforonlinesellers.com