1. Defining the Tax Base
To map future tax consequences, an accountant must calculate an asset or liability’s tax base. The tax base of an item is the amount attributed to that asset or liability for tax purposes by the revenue authorities.
2. Determining the Tax Base of an Asset
The tax base of an asset is the amount that will be deductible for tax purposes against any taxable economic benefits that will flow to the entity when it recovers the carrying amount of the asset. If those economic benefits will not be taxable, the tax base of the asset is equal to its carrying amount.
Tax Base of Asset = Amount deductible in future periods against taxable economic benefits
Tax Base of Asset = Amount deductible in future periods against taxable economic benefits
  • Example: A company purchases equipment for $100,000. It has accumulated book depreciation of $20,000, giving a carrying value of $80,000. For tax purposes, accelerated tax depreciation of $40,000 has been claimed. The tax base of the asset is:

    100000 − 40000 = 60000

3. Determining the Tax Base of a Liability
The tax base of a liability is its carrying amount, less any amount that will be deductible for tax purposes regarding that liability in future periods. For revenue received in advance, the tax base of the resulting liability is its carrying amount, less any amount of the revenue that will not be taxable in future periods.
Tax Base of Liability = Carrying Amount − Amount deductible for tax purposes in the future
  • Example: A company records an accrued expense liability of $10,000 for local litigation costs. The expense will only be deductible for tax purposes on a cash basis when paid. The tax base of this liability is:

    10000 − 10000 = 0

 
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