Tax Base of Assets and Liabilities

Tax base is the amount at which an asset or liability is valued for tax purposes.

Tax Base of Assets

The following are a few examples of calculating tax bases for various assets.

Asset	Calculation of Tax Base
Depreciable Equipment	The cost of the equipment: $1,000,000Depreciation is done using straight-line method at 10% per annum, i.e., $100,000 per year. Depreciation allowed under income tax is 15%. Carrying value after one year = 900,000 (1,000,000 – 100,000) Tax base after one year = 850,000 (1,000,000 – 150,000) Carrying amount is greater than tax base. Due to this difference, a deferred tax liability equal to 50,000 * tax rate is created.
Development costs	A company capitalized $1,000,000 of development cost. $200,000 of this amount was amortized during the year.For tax purpose, upto 25% of the amount can be amortized. Carrying value after one year = 800,000 (1,000,000 – 200,000) Tax base after one year = 750,000 (1,000,000 – 250,000)
Research costs	A company incurred $1,000,000 on research costs. The entire cost was expensed in the current year.The tax laws allow research cost to be expensed over a 5-year period. The carrying amount = $0. Tax base = 1,000,000 – (1,000,000/5) = $800,000 This leads to the creation of a deferred tax asset as taxable income is higher than earnings before tax.
Accounts receivable	The company has a provision for doubtful debt = $100,000Accounts receivable after adjusting for provision = $1,000,000 Tax laws allow a 25% deduction for doubtful debt on gross receivables. Accounts receivable before provision of doubtful debt = $1,000,000 + 100,000 = $1,100,000 Tax base = 1,100,000 * (25% of 1,100,000) = 82,5000 This leads to the creation of a deferred tax liability.

Tax Bases of Liabilities

The following are a few examples of calculating tax bases for various liabilities.

Liability

Calculation of Tax Base

Advance paid by customer

A customer has paid an advance amount of $100,000 but the product will be delivered only in the next financial year.Tax laws require advance revenue to be taxable when collected. Advance revenue will be a liability with a carrying value of $100,000.Tax base will be zero because the entire amount has been taxed in the year in which the advance is received and it will not be taxed in the future.This will lead to the creation of a deferred tax asset because the amount is taxed but the revenue is not reported in the income statement.