Tax Notes covers the latest developments, including Internal Revenue Service guidance, legislation, controversy and litigation, in all issues relating to tax basis. The Internal Revenue Code defines basis in section 1012 as the cost of property. Basis is a concept that is discussed throughout the tax code.
Taxpayers will generally calculate gain or loss by calculating the difference between the consideration received when transferring the property and its basis. The basis can be the price paid for the property and can be adjusted for depreciation or capital expenditures.
Depreciation, discussed primarily in section 167 is an income tax deduction that allows a taxpayer to recover the cost or other basis in property as an offset to wear and tear, deterioration, or obsolescence of the property. Most property types, except for land, are depreciable.
When a taxpayer buys stocks or bonds, it acquires a basis in this property. The basis is generally the price paid, but a taxpayer may elect to use a first-in-first-out method to determine basis of the stocks sold. Holders of debt instruments issued with an original issue discount must take interest income as it accrues. When the taxpayer accrues the interest, it must also make appropriate adjustments to its basis.
For trades and businesses, the uniform capitalization rules provide guidance for when a taxpayer should add costs of business to the basis of the business assets. Capitalization is a term that refers to a taxpayer that spends money in a trade or business and must add that cost to the basis of property rather than immediately deduct the payment.
