How Do You Value Assets Converted to Business Use for Tax Purposes?

When you start up a business, you may purchase assets such as furniture and fixtures, equipment, machinery, vehicles, and maybe real property for use in your business. You may acquire other assets through trades or as gifts. And you may convert personal assets to business use. You will need to establish the value of these assets for tax purposes.

For calculating depreciation

According to the IRS, the basis assigned to assets converted from personal use to business use is the lesser of the fair market value on the date of the change or your adjusted basis in the property on the date of the change. Your adjusted basis would normally be your original cost plus any permanent additions or improvements you made to the property, minus any casualty loss you may have claimed on the asset.

For example, suppose you have a house that you purchased for $150,000 and you made $20,000 in improvements. You later decide to use the house for your business when it has a fair market value of $130,000. The value for tax depreciation purposes would be $130,000 since this is less than your adjusted basis of $170,000 (original cost of $150,000 plus $20,000 in improvements).

For calculating gain or loss on sale

If you later sell or dispose of an asset converted from personal to business use, the basis you use depends on whether you have a gain or loss. To calculate a gain you would use your adjusted basis when you sell the property. To calculate a loss you would start with the lesser of your adjusted basis or the fair market value of the asset when you converted it to business use. Then you would adjust that amount for the change, such as depreciation, after you changed the property to business use.

Using the above example, if you claimed $15,000 in depreciation for using the house in your business and then sold the house for $160,000, the basis you use would be $155,000 ($170,000 minus depreciation of $15,000), even though this is different from the basis you used for depreciation. Your gain would therefore be $5,000.

If you sold the house for $100,000, the basis you use would be $115,000, which is the fair market value of $130,000 when you converted the house to business use (since that was lower than your adjusted basis on that date), minus the $15,000 in depreciation. Your loss would therefore be $15,000.

Assets used for personal and business purposes

If you use an asset, such as a vehicle or a part of your home, for both personal and business purposes, it would not be considered a business asset. You could claim a business expense for business use of your vehicle using either the standard mileage rate or actual costs. If you use actual costs you could include depreciation on the vehicle according to the percentage of business use based on mileage.

If you use a portion of your home for business purposes, you can claim a depreciation deduction. You figure the depreciable basis by multiplying the percentage of the home you use for business by the lesser of the home's fair market value or your adjusted basis on the day you start using that portion of your home for business purposes. If you make permanent improvements to a part of your home to convert it to business use, those improvements would be depreciated separately.

Sources:
Publication 551, Basis of Assets, IRS
Publication 587, Business Use of Your Home, IRS