Definition: The total cost of buying and putting a piece of equipment or other asset into service. This cost is the initial value that a company records at the time the asset is purchased. If the asset is a type that loses value over time, this basis is reduced as depreciation is recorded.
Example: A small stationery company purchases a new printing press for $10,000. The company was charged $500 in sales tax when it made the purchase, another $200 for it be delivered, and $300 for a technician to set up the press on site and train the company on how to use it. For the stationery company, the total cost to acquire the press and have it ready for use is the total of all these costs: $10,000 + $500 + $200 + $300, or $11,000. This is its cost basis (or simply basis).
Taking this further, let’s say that the company wanted to depreciate the press using the straight-line method over its useful life of 10 years, and that it won’t be worth anything at that time (ie, it will have no salvage value). The company would record depreciation of $11,000 / 10, or $1,100 per year.
Investeach explains: There are different rules for calculating the basis of different types of assets. Normally, an asset’s basis is highest when it is acquired and then is gradually reduced as the equipment is used and depreciation is recorded. However, it is possible for the cost basis to rise. This will occur when a company spends money to improve an asset. For further reading on the subject, read IRS Publication 551.
Riddle me this:
1. Besides the purchase price of a piece of equipment, what other costs can be included in its cost basis?
2. Why does the cost basis of equipment fall over time?
3. In what situation may the cost basis of an asset actually rise?