Save Time With AI: Explaining Basis to a Non-Accountant

Do clients struggle to understand accounting and tax concepts? AI can help provide simple, plain English explanations, saving you time. Here's an example.

I spotted this question from a CPA on Twitter:

Any good plain-English way to explain basis? Clients find it hard to grasp w/out getting technical or drawing it. It's been an issue with losses, zero basis, and/or EIDL-funded distributions.

ChatGPT to the rescue!

Here's the prompt I gave it:

I am a tax accountant. You are a helpful writer. Please draft a plain English explanation of tax basis that I can provide to a client to help them understand the concept. Please address the issue of distributions when basis goes to zero.

And here's the full response from ChatGPT 4:

What is Tax Basis?

Imagine you bought a piece of art for $100. In the world of taxes, that $100 is your "tax basis" in the art. It's basically the starting point for figuring out how much tax you might owe when you sell it.

Now, let’s say you sell that art for $150. The tax you owe isn't on the full $150. Instead, it's on the profit you made, which is $50 ($150 selling price - $100 tax basis). That $50 is what you're taxed on.

What Happens When You Invest in Something, Like a Business?

Things get a bit more complex when you invest in something like a business. Let's say you invest $1,000 in a company. That's your tax basis. If the company does well and you receive distributions (like cash payments), these reduce your tax basis. So, if you get $100, your tax basis goes down to $900.

What If Your Basis Hits Zero?

Now, here's the tricky part. What if you keep getting distributions, and your tax basis hits zero? Let's say you've received a total of $1,000 in distributions over time. Your basis is now zero. What happens next?

If you get more distributions after your basis hits zero, these are now considered a gain, something like profit. This means you'll have to pay tax on them, just like you would on income.

Why Does This Matter?

Understanding your tax basis is crucial. It helps you figure out how much you might owe in taxes when you sell an investment or receive distributions. It's like keeping track of your spending in a budget - knowing where you stand can help avoid surprises later, especially when it comes to taxes.

What do you think? Not bad, right? Or did it make any critical errors?

Note that it doesn't have to be perfect. Now your job is to review the answer, make edits, and ship it. It's much easier than writing it from scratch, at least for me.

AI becomes an extension of your expertise, not a replacement. And it allows you to be a better advisor by clarifying concepts to clients, not just doing the work.

For more examples of how you can use AI to save 15% or more of your time, join my free Earmark webinar: https://streamyard.com/watch/TksQdzFqmygq