Donation vs. Cost Basis
Original post by Kathy Adams McIntosh of Demand Media
Companies use assets in a variety of ways. Employees use lawn mowers to cut customer lawns. Administrative employees report to an office building to work. Managers run reports from computer systems. When the company chooses to replace its assets, it needs to dispose of the old assets. The company faces the decision of donating the asset to charity, selling the asset or keeping the asset on hand for emergencies. The company needs to know the asset’s donation basis and its cost basis as it makes this decision.
An asset’s donation basis refers to the dollar value placed on the asset if the company decides to donate the asset to charity. Companies who donate assets gain the opportunity to deduct the donation basis of that asset when they file their tax returns. The donation basis of the asset usually equals the fair market value of the asset. The fair market value can be determined by comparing the prices of similar items. If the charity resells the asset for cash, the selling price represents the fair market value of the asset.
An asset’s cost basis refers to the dollar value of the asset in the company’s financial records when adjusted for depreciation. The financial records contain the cost incurred when the company acquired the asset. This includes the price the company paid for the asset and any charges incurred to get the asset operational. The company maintains the total depreciation recognized on the asset in an account called Accumulated Depreciation. The company subtracts the balance of Accumulated Depreciation from the asset value to determine the cost basis of the asset. If the company sells the asset, it subtracts the cost basis from the selling price to determine the gain, or income, recognized on the sale.
Several similarities exist between the donation basis and cost basis of an asset. Both values assign a dollar amount to the asset. Both values assist the business owner in making decisions. The business owner uses the donation basis to calculate the potential tax reduction and the cost basis to calculate the potential gain. This helps the owner decide whether to sell or donate the asset.
Several differences exist between the donation basis and the cost basis of an asset. The company uses the donation basis to calculate a tax deduction and to reduce its income tax liability. The cost basis makes no impact on the company’s income tax liability. The donation basis finds its value by considering the current price of the asset. The cost basis finds its value by considering the historical price of the asset.
- IRS.gov: Publication 561 -- Determining the Value of Donated Property
- AccountingCoach; Balance Sheet; Harold Averkamp
- Accounting Financial & Tax; Accounting For Fixed Asset Purchase and Cost Capitalization; June 2010
About the Author
Kathy Adams McIntosh started writing professionally in 2001. She has been published in "Cup of Comfort," "Community Connection" and "Wisconsin Christian News." Adams McIntosh belongs to the Fearless Freelancers and the Broadway Writers Guild. She earned her Master of Business Administration from the University of Wisconsin.