What Is Adjusted Cost Base (ACB)?
An adjusted cost base (ACB) is an income tax term that refers to the change in an asset's book value resulting from improvements, new purchases, sales, payouts, or other factors. An adjusted cost base can be calculated on a single or a per-unit basis and represents the actual cost to a buyer or seller.
- Adjusted cost basis (ACB) modifies the cost basis of an asset to account for fees, commissions, or other charges associated with the transaction.
- ACB can also modify the tax basis based on material changes or capital improvements made to the asset that affects its value.
- ACB is used primarily for tax purposes in reporting capital gains or losses, or depreciation.
Understanding Adjusted Cost Base (ACB)
The book value can be adjusted because of a change or improvement made to the asset, such as upgrades to real estate. For example, if a company purchases an office building, then invests more money towards expanding and updating the building, the combined costs are factored together to find the adjusted cost base.
However, maintenance and repair costs for the property wouldn't be factored into the equation. The new adjusted cost base is then used to compute the gain or loss when it is sold. If the building in the above example is sold, the adjusted cost base is compared with the sale price to determine the return on the asset. In some jurisdictions, the adjusted cost base must be used as the cost of the asset for capital gains purposes.
How Adjusted Cost Base Is Calculated
Reinvested dividends and commissions paid to brokers may be included in the adjusted cost base. If such commissions can be lowered, there may be improvements to the adjusted cost base. The calculation of the adjusted cost base is part of determining the true cost of an investment.
Tax collection entities may require taxes to be paid on capital gains on investments and other types of property, which is why the adjusted cost base must be calculated. Furthermore, those tax collection entities might also mandate that a running total of adjusted cost base be recorded for tax filing purposes.
To determine the adjusted cost base, all of the costs related to the purchase of investments, including bonds, stocks, and mutual funds, must be factored in. That also includes commissions and fees stemming from the purchase of the assets, with the total overall cost divided by the shares of the asset. The adjusted cost base must be recalculated as more shares are acquired or sold, including the associated transaction fees.
The adjusted cost base comes into play when capital gains or loss related to a transaction must be determined. The calculation is done with a formula where the proceeds from a sale of the asset, after transaction fees are factored and then subtracting the adjusted cost base multiplied by the total shares in the transaction.