Tax Guide for Farmers – Basis of Assets, Part 3: Adjusted Basis

In the Internal Revenue Code concerning farmers, there is a section on the basis of assets. The purpose of this series of articles is to provide an overview of the rules concerning the basis of assets. Whereas the previous articles focused on Cost Basis and Allocating Basis, the focus of this article is Adjusted Basis.

Adjusted Basis

Before you are permitted to calculate the gain or loss on the sale or other disposition of an asset or the allowed amortization, depreciation, or depletion, you are required to adjust the basis of the property. The adjusted basis can be higher or lower than the original basis depending on your situation.

Increases to Basis

You must increase the basis of property by an amount that represents any additions. Additions that increase the basis of property include the following:

  • Assessments for paving roads, building ditches, or making other improvements that increase the value of the assessed property.
  • Costs to extend utility service lines to property.
  • Legal fees related to defending or perfecting title to the property.
  • Legal fees related to seeking a decrease in assessments levied against property related to funding local improvements.

For any additions or improvements to business property, you must depreciate the basis of each addition or improvement as separate property from the original property, using the rules that apply to the original property if you had placed it in service at the same time you placed the addition or improvement into service.

You should not increase the cost basis of property by an amount you can deduct as a current expense. Typically, you can deduct amounts paid for maintenance and repairs to property if those amounts do not otherwise have to be capitalized.

However, you can choose to capitalize amounts paid for maintenance and repairs if such treatment aligns with your treatment of these costs in your books. If you choose this election, you must apply it to all amounts paid for maintenance and repair to tangible property that you treat as a capital expense on your books in that tax year.

Decreases to Basis

You must decreases the basis of property by an amount that represents any subtractions or detriments to the value. These include the following:

  • Alternative fuel vehicle refueling property credits.
  • Alternative motor vehicle credits.
  • Casualty and theft losses and insurance reimbursements.
  • Canceled debt excluded from income.
  • Deductions allowed previously for amortization, depreciation, or depletion.
  • Exclusions from income of subsidies for energy conservation measures.
  • Gas-guzzler taxes.
  • Investment credits taken.
  • Manufacturer or seller rebates.
  • Patronage dividends received from cooperative association as the result of a purchase of property.
  • Payments received for granting an easement.
  • Residential energy efficiency property credits.
  • Section 179 deductions.

Following is additional information about some of these items.

Canceled Debt Excluded from Income

If a debt you owe is canceled or forgiven, you must include the canceled amount in your gross income for tax purposes. You can exclude any of the following as canceled debt:

  • Debt canceled as a part of bankruptcy or insolvency.
  • Discharge of certain indebtedness because of a Midwestern disaster.
  • Qualifying farm debt.
  • Qualifying real property business debt

Casualty and Theft Loss

If you have a casualty or theft loss, decrease the basis of the property by any insurance or other reimbursement you receive. In addition, decrease the basis by any deductible loss not covered by insurance.

You must increase the basis by any amount you spend to return the property to its original condition before the casualty or theft event.

Depreciation

Decrease the basis of the property by the amount of the depreciation you deducted or could have deducted under your chosen method of depreciation. If you took less depreciation than you could have taken or took not depreciation, decrease the basis by the amount you could have taken.

Easements

Any amount you receive for granting an easement is considered to be proceeds from the sale of an interest in the property. Reduce the basis of the property by this amount.

Exclusions from Income of Subsidies for Energy Conservation Measures

You can exclude from gross income any subsidy you receive from public utility companies for the purchase or installment of energy conservation measures for a dwelling.

Section 179 Deductions

If you take the section 179 deduction for all or part of the cost of the property, you must decrease the basis of the property by the deduction.

What can you do if you have other questions about adjusted basis?

You can get additional help by contacting a tax attorney. A tax attorney is the only individual who has the training and experience to address tax questions and file tax returns, as well as offering the confidentiality of attorney-client privilege that is the privilege of lawyers.

You can get in touch with a tax attorney by calling the telephone number at the top of this web site or by submitting the form below. So take the first step in getting the help you need today by contacting a tax attorney.

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by Mark Johnston

Mark has been a contributor to legal web sites related to bankruptcy, tax, and criminal law since 2011. He has an Accounting degree from Texas A&M University.