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.

AssetCalculation of Tax Base
Depreciable EquipmentThe 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 costsA 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 costsA 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 receivableThe 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.

LiabilityCalculation of Tax Base
Advance paid by customerA 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.
DonationsA company received donations worth $100,000 in the current period. The donations were expensed in the income statement.According to the tax laws, donations are not tax-deductible.
The carrying value = $0 since entire amount is expensed.
Tax base equals the carrying amount since the donations are not tax-deductible.
Though the amounts are same, the treatment for accounting and taxation is different. This results in a permanent difference.
LoanA company secured a loan of $100,000 in the current period. Interest on loan is 12% per annum payable at the end of each year.There are no tax implications for loan repayment. The interest paid is treated in the same way for both accounting and taxation.
The tax base and carrying value will be $0.
Advance rent receivedA company receives advance rent of $100,000. The amount is deferred for tax purpose but taxed on a cash basis.The carrying amount of the advance rent received will be $100,000. It is a balance sheet liability and the income relates to future financial year.
The tax base will be $0 as the entire amount is taxed in the current period.

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