BASIS
The minimum, fundamental constituents, foundation, or support of a thing or a system without which the thing or system would cease to exist. In
accounting, the value assigned to an asset that is
sold or transferred so that it can be determined
whether a gain or loss has resulted from the trans-
action. The amount that property is estimated to
be worth at the time it is purchased, acquired, and
received for tax purposes.
In a simple case, the basis of property for tax
purposes under the INTERNAL REVENUE CODE is
the purchase price of a piece of property. For
example, if a taxpayer purchases a parcel of land
for $500,000, and no deductions apply to that
parcel of land, the taxpayer’s basis is $500,000. If
the taxpayer later sells the property for $550,000,
the amount of gain realized by the transaction is
the sale price ($550,000) less the adjusted basis
($500,000), or $50,000.
Where a taxpayer is allowed to depreciate
property with a limited useful life, such as an
automobile used primarily for business pur-
poses, the taxpayer’s adjusted basis is reduced.
Assume a taxpayer purchases an automobile for
$30,000, and then claims deductions for $5,000.
The adjusted basis of the automobile is then
reduced to $25,000.When the taxpayer sells the
automobile for $26,000, the amount of gain
realized is $1,000 (the sale price of $26,000 minus the adjusted basis of $25,000).
FURTHER READINGS
Bankman, Joseph et al. 2002. Federal Income Tax: Examples
and Explanations. New York: Aspen Law & Business.
Hudson, David M., and Stephen A. Lind. 2002. Federal
Income Taxation. St. Paul,Minn.:West.
CROSS-REFERENCES
Internal Revenue Code; Profit.
