## What it is:

Adjusted cost base (ACB) is an income tax term that refers to an adjustment in an asset's book value resulting from the cost of improvements, payouts, and similar improvements or dispositions.

## How it works (Example):

Let's assume Company XYZ buys a factory building for \$1,000,000. If Company XYZ spends \$500,000 to enlarge the building and bring older parts of the building up to code, then the adjusted cost base (ACB) on the building would equal \$1,000,000 + \$500,000 = \$1,500,000.

Hard assets aren't the only assets that can have adjustments made to their cost basis. Investors in mutual funds will want to keep track of their ACB by using the following formula:

ACB per unit = (initial investment + additional contributions + reinvested distributions - previous redemptions) / units owned

## Why it Matters:

ACB is important because it is used to compute taxable gains and losses when the asset is sold.

In our example, if Company XYZ sells the factory for \$2,000,000, the taxable gain is \$2,000,000 - \$1,500,000 = \$500,000 rather than \$2,000,000 - \$1,000,000 = \$1,000,000.

Assuming a 30% tax rate, this means Company XYZ saves \$150,000 in taxes.