What is the difference between the tax-adjusted basis and the accounting basis?


The idea behind generally accepted accounting principles is to enforce a certain level of consistency between the financial statements and accounting policies of different companies. However, it is possible that a company’s financial statements or books could differ from its tax returns. In fact, many U.S. companies keep two sets of books: one that complies with generally accepted accounting principles and another that complies with IRS regulations.

Tax-adjusted basis
The tax-adjusted basis is a measure of what an asset is worth for tax purposes. The tax-adjusted basis is calculated by taking the original cost or other basis of the asset in question and adjusting for various tax exemptions such as depreciation.

Book-adjusted basis
The book-adjusted basis is a measure of what an asset is worth, from a company’s perspective, on its books. The carrying amount of an asset can change due to factors such as improvements in an asset or depreciation of an asset.

Both methods are acceptable
There are specific tax policies that can cause a company to record gains and losses in a different way than it does on its books. A company can potentially reduce its tax burden by showing certain assets tax-neutral when filing its tax return. However, the carrying amount of these assets can be adjusted in other ways to meet the company’s reporting requirements.

When it comes to depreciation, the difference between the tax-adjusted and the accounting basis often comes into play. Depreciation is a method of accounting for the decrease in value of an asset over time. Companies generally use two main types of depreciation: linear and accelerated. With straight-line depreciation, an equal percentage of the value is depreciated over the useful life every year. Accelerated depreciation involves depreciating a higher percentage of an asset’s value earlier in its useful life. Because accelerated depreciation results in higher depreciation amounts that are tax deductible, many companies choose to display depreciated assets on a tax-neutral basis. However, for internal accounting purposes, they may choose to present the same assets on an accounting basis.

Since a company’s financial statements and books serve a different purpose than tax returns, some differences between the two are acceptable. As long as a company adheres to the rules and standards of both generally accepted accounting principles and the Internal Revenue Code, it can use different reporting methods to its advantage.

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