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What is Adjusted Cost Basis?

Adjusted Cost Basis (ABC) is the value of an item for tax purposes, adjusted for depreciation and expenditures.

Sometimes abbreviated ABC, adjusted cost basis is the valuation of an item for tax purposes; that is, if it is to be bought or sold, what gains or losses would be assigned to it? Some business assets are depreciated on a set schedule, such as equipment.

For equipment sold or taken as part of an acquisition a few years after it was purchased, the depreciation factor would reduce the value of the item for tax purposes by perhaps as much as 20% per year. If a company spent significant amounts of money improving a facility, the cost basis of the facility would go up by that amount.

Cost basis accounting also applies to investment accounts, and can be confusing if there are dividend distributions which are reinvested over time. Normally the investment company can offer average cost basis calculations, but individual investors are responsible for keeping up with their own adjusted cost basis, and it helps to have a good accountant.

Keywords: cost basis, depreciation, capital expenditures, Mergers and Acquisitions (M&A),