Definition of a Tax Basis Balance Sheet

Tax basis balance sheets follow the same format as regular balance sheets but are designed as if they were prepared for tax purposes. Tax basis balance sheets provide managers with the current deferred tax liability of a company assuming all assets were sold at their current value value and all liabilities could be paid off at the value reported in the balance sheet.

The deferred tax liability of a business, also known as deferred taxes, originates from differences between a company's assets and liabilities balance sheet value and its tax basis value -- that is, the difference between the value reported on a regular balance sheet and its current tax basis value. A tax basis balance sheet allows you to calculate your deferred tax liability.

The difference between the way you report assets in a regular balance sheet and a tax basis balance sheet is that tax basis balance sheets reflect the current tax basis value of assets. For instance, a company may report on its balance sheet a fleet of 10 cars as assets worth $200,000. However, if the company bought the fleet five years ago, the tax basis value will no longer be $200,000. In a tax basis balance sheet, you report the depreciated value of assets.

In a tax basis balance sheet, the liabilities of a company are reported at their true current value, assuming the business paid for the liability immediately. For instance, if a business has a mortgage for $1 million with a prepayment penalty of 10 percent, the current value or tax basis value of the mortgage would be $1.1 million because that is what it would cost to remove the liability from the balance sheet.

Companies that keeps a tax basis balance sheet are more efficient at calculating their tax liability. A tax basis balance sheet also offers risk mitigation benefits when reporting for income taxes and a streamlined method to calculate income tax balances for auditors. This hands-on approach to tax liabilities also gives a business more control over their tax accounting processes and can help automate tax calculations.