Before adjustments, an asset’s cost basis is the recorded amount of its total cost, which is then used for tax purposes. Since gains on assets that are sold are usually taxed, a small business must record how much it paid for an asset, such as property or investments, so it doesn’t pay any unnecessary taxes. An adjusted cost basis (ACB) is a cost basis value that has been changed to account for special items. With property, for example, ACB can include the cost to acquire the property plus expenses associated with obtaining the property, such as legal fees and broker commissions. Beyond that, the ACB can also legally include costs of improvements or additions to the property, which are known as capital expenditures, but you can’t include normal routine expenses for maintenance and repairs in the ACB. With market investments such as stock, the ACB is calculated to account for stock splits, dividends, and capital distributions. The financial institution you have invested with usually supplies the ACB for your investments. Keep in mind that they don’t always do this, so you must confirm that you have the correct cost basis number. This idea of ACB is important for businesses to ensure that they don’t pay any more taxes than necessary. Figuring out an asset’s ACB can have a very significant impact on the amount of taxes owed when a sale occurs. For example, assume a business owner pays 30% tax on the gains from a sale. He purchases a warehouse for $500,000 and later expands the facilities by spending $250,000. In the future, he sells the property for $1 million. The unadjusted cost basis is $500,000, which means the gain on the $1 million sale is: $1 million – $500,000 = $500,000. Taxes on this would be $150,000. But using ACB, the total cost basis is ($500,000 + $250,000) and the total gain on the sale is only $1 million – $750,000 = $250,000. Now only $75,000 is due in tax. Accounting for the ACB saves the business owner a lot of money.

References & Resources

• cra-arc.gc.ca