Adjustments to the Basis

If, like most taxpayers, you use the standard depreciation charts to compute your depreciation expense each year, your tax basis for the asset at the time you begin depreciating it will generally remain the same. You will multiply your original basis by a fraction that may change each year.

Tip

The IRS has issued new regulations in this area that generally apply to tax years beginning on or after January 1, 2014. But, for 2012 and 2013, it also provided taxpayers with the ability to elect certain regulations. The best choice for each taxpayer depends on the taxpayer's unique situation. Consult your advisor to determine which approach would be best for you and your business.

But, in addition to the original basis of the asset, you may also need to know your adjusted basis if you sell, trade or dispose of the asset, or suffer a casualty loss. Once you've claimed some depreciation on a piece of business property, the depreciation would be deducted from the cost to arrive at the adjusted basis.

It's important that you (or your accountant) keep capital asset records that include the amount of accumulated depreciation you've claimed for each asset over the years, so you can easily compute the adjusted basis when the need arises. These records should be retained as long as you own the asset.

Planning Tools

You can use this depreciation worksheet to keep track of your tax basis over time.

Other events that can require an adjustment to the basis are casualty losses for which you've claimed a tax deduction, or additions or improvements to the property. You'll need to keep a record of these items, too, and save them until you eventually dispose of the property.

Additions or improvements are treated as separate, depreciable assets that have the same property class and recovery period that would apply to the original property if it was placed in service at the time of the improvement. However, when the underlying property is sold, any undepreciated value of the additions or improvements must be added to the asset's tax basis to compute your taxable gains or losses.

Casualty loss deductions are subtracted from your adjusted tax basis in the property as of the year the loss occurred. Once you have a deductible casualty loss, you must use the new, adjusted basis of the property, instead of the original basis, for depreciation purposes. What's more, you can no longer use the tables to compute your depreciation expense. Instead, you'll have to use the actual formulas on which the tables are based. Consult your tax advisor or IRS Publication 946, How to Depreciate Property, for details on how this is done.