What is Cost Basis?
Cost basis is the original value of an asset for tax purposes — what you paid for it. Learn how to calculate cost basis, why it matters for business assets, and how it relates to invoicing and expense tracking.
What Is Cost Basis?
Cost basis is the original monetary value of an asset — what you paid for it, plus any costs necessary to acquire it and put it into service. It's the starting point for calculating depreciation, capital gains, and tax deductions. Think of cost basis like the "zero point" on a scale. When you sell an asset, the government wants to know: did you gain money (capital gain) or lose money (capital loss) compared to what you originally invested? Cost basis is that original investment number. For freelancers, cost basis applies most commonly to: - Equipment (computers, cameras, machinery) - Software licenses (if capitalized, not expensed) - Furniture and fixtures - Vehicles used for business - Investment properties held for business use
How to Calculate Cost Basis
Basic formula: > Cost Basis = Purchase Price + Acquisition Costs + Improvement Costs − Depreciation Taken Acquisition costs that can be added to cost basis: - Sales tax paid - Shipping and delivery charges - Installation and setup fees - Testing and calibration costs - Legal fees directly related to the purchase Example: Freelance Photographer A freelance photographer buys a new camera system for $6,500: | Item | Cost | |---|---| | Camera body | $4,000 | | Two lenses | $2,000 | | Camera bag | $150 | | Extended warranty | $350 | | Sales tax (8%) | $520 | | Total Cost Basis | $7,020 | This $7,020 is the photographer's cost basis in the equipment. When depreciating the asset for taxes (over 5 years for most equipment under Section 179), they'll depreciate $7,020 — not just the $6,500 sticker price.
Cost Basis and Depreciation
For tax purposes, you generally can't deduct the full cost of a business asset in the year you buy it (unless it qualifies for Section 179 expensing). Instead, you depreciate it — deducting a portion of the cost basis each year over the asset's useful life. Adjusted Cost Basis = Original Cost Basis − Depreciation Taken If the photographer takes $1,404 in depreciation in year 1, their adjusted cost basis entering year 2 is $7,020 − $1,404 = $5,616. If they sell the camera for $4,500 in year 2, their capital loss is $5,616 − $4,500 = $1,116.
Cost Basis and Invoicing
Cost basis doesn't directly appear on invoices — it's an internal accounting and tax concept. But it connects to invoicing in two ways: 1. Pass-through expenses: If you buy equipment specifically for a client project, you may bill the client for it. The cost basis is your reference point for what to charge (you don't want to charge less than your cost basis, ideally). 2. Asset tracking for tax deductions: Accurate cost basis records ensure you claim the correct depreciation deductions. If you undertrack cost basis, you over-deduct — and the IRS will correct you at audit time.
Cost Basis Methods
There are several ways to calculate cost basis, depending on the situation: | Method | Description | Common Use | |---|---|---| | Specific Identification | Track each specific item's cost | Unique assets, art, cars | | FIFO (First In, First Out) | First asset purchased = first asset sold | Most common for businesses | | LIFO (Last In, First Out) | Last asset purchased = first asset sold | Inventory in inflationary periods | | Average Cost | Average cost of all identical assets | Stocks, mutual funds |
The Bottom Line
Cost basis is your asset's tax foundation — what you paid, what you've deducted, and what remains. Accurate cost basis records protect you from over-deducting, under-deducting, and audit-triggering errors. Keep receipts, track acquisition costs, and log depreciation from day one. (Track assets and expenses automatically →) (Learn about depreciation →) (Understand business expense rules →) Key Takeaways: 1. Cost basis = purchase price + acquisition costs + improvements − depreciation 2. It's used to calculate capital gains/losses when you sell an asset 3. Accurate cost basis prevents over-deducting and triggering IRS attention 4. Keep all receipts and documentation of acquisition costs 5. Depreciation reduces your adjusted cost basis each year Track every business asset's value automatically — Try Eonebill Free Eonebill helps you categorize and track business expenses and assets, so your cost basis is always documented and ready come tax time. View Pricing → | Glossary Home → | Home →